Information Acquisition and the Value of bad News
When an interested party controls both the acquisition and the transmission of evidence and some of her information is unverifiable, a tension between selective revelation and benefits of transparency arises. The interested party might hence find it optimal to reveal unfavorable evidence even though disclosure is discretionary. While this revelation policy yields to more accurate decisions, informativeness is non monotone in the extent of voluntary disclosure. The model provides a rationale for adverse announcements such as product recalls and earning warnings and implications for mandatory disclosure laws.
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