Voluntary Precision Disclosure and Endogenous Market Feedback

50 Pages Posted: 23 Mar 2017 Last revised: 14 Oct 2022

See all articles by Jan Schneemeier

Jan Schneemeier

Michigan State University - Eli Broad College of Business

Date Written: February 16, 2019

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, increasing price informativeness and improving the firm’s investment efficiency. We highlight a novel trade-off: on the one hand, more precise public information crowds out traders' information acquisition by leveling the playing field. On the other hand, there can also be a crowding-in effect because high-precision disclosures indicate greater managerial confidence and higher investment, which increases the traders' value of information. The crowding-in effect can dominate if the firm discloses above-average profitability. We derive testable predictions regarding the financial market consequences of supplemental disclosures that are informative about the precision or relevance of payoff-related signals.

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

JEL Classification: D82, G14, M41

Suggested Citation

Schneemeier, Jan, Voluntary Precision Disclosure and Endogenous Market Feedback (February 16, 2019). Available at SSRN: https://ssrn.com/abstract=2938045 or http://dx.doi.org/10.2139/ssrn.2938045

Jan Schneemeier (Contact Author)

Michigan State University - Eli Broad College of Business ( email )

632 Bogue St
East Lansing, MI 48824
United States

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