Optimal Disclosure and Fight for Attention

Abstract

In this paper, firm managers use their disclosure policy to direct speculators' scarce attention towards their firm. More attention implies greater outside information and strengthens the feedback effect from stock prices to firm investment. The model highlights a novel trade-off associated with disclosure. While more precise public information crowds out the value of private information, it can also signal high firm quality to the financial market. If the spread between the (unknown) quality of firms is sufficiently high, there is a separating equilibrium with partial disclosure by high-quality firms and no disclosure by low-quality firms. Otherwise, there is a (more efficient) pooling equilibrium without disclosure. Perhaps surprisingly, the introduction of short-run incentives and disclosure caps increases investment efficiency.

Keywords: attention allocation, disclosure, feedback effect, asymmetric information, real efficiency

JEL Classification: D82, D83, G14