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, 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