Disclosure to a Credulous Audience: The Role of Limited Attention
David A. Hirshleifer
University of California, Irvine - Paul Merage School of Business
Sonya S. Lim
DePaul University - Department of Finance
Siew Hong Teoh
University of California - Paul Merage School of Business
February 4, 2002
Dice Center Working Paper No. 2002-3
We model limited attention as incomplete usage of publicly available information. Informed players decide whether or not to disclose to observers who sometimes neglect either disclosed signals or the implications of non-disclosure. In equilibrium observers are unrealistically optimistic, disclosure is incomplete, neglect of disclosed signals increases disclosure, and neglect of a failure to disclose reduces disclosure. Regulation requiring greater disclosure can reduce observers' belief accuracies and welfare. Disclosure in one arena affects perceptions in fundamentally unrelated arenas, owing to cue competition, salience, and analytical interference. Disclosure in one arena can crowd out disclosure in another. A player may disclose in one arena to distract from bad news in the other (a "wag the dog" effect).
Number of Pages in PDF File: 42
JEL Classification: D82, G14, G18, M41, M45working papers series
Date posted: February 13, 2002
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