Voluntary Precision Disclosure and Endogenous Market Feedback

Abstract

We explore a manager's incentives to disclose the precision of a signal about firm profitability. Voluntary disclosure of precision information encourages traders to acquire private information and thus increases the informational content of the stock price, which guides the firm's real investment decision. We highlight a novel trade-off: on the one hand, more precise public information crowds out traders' private information acquisition because it levels the playing-field. On the other hand, there can also be a crowding-in effect because high-precision disclosures indicate greater managerial confidence and thus higher investment, which increases the traders' value of private information. For positive fundamental information, the net effect is ambiguous, for negative information the crowding-out effect dominates.

Keywords: precision information, voluntary disclosure, information acquisition, market feedback

JEL Classification: D82, G14, M41