Optimal Disclosure and Fight for Attention
45 Pages Posted: 23 Mar 2017 Last revised: 17 Dec 2018
Date Written: November 1, 2018
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 the high-quality firm and no disclosure by the low-quality firm. Otherwise, there is a (more efficient) pooling equilibrium without disclosure. Surprisingly, an increase in the managers' short-run incentives and disclosure caps lead to more efficient investment decisions.
Keywords: attention allocation, disclosure, feedback effect, asymmetric information, real efficiency
JEL Classification: D82, D83, G14
Suggested Citation: Suggested Citation