Ex Post Voluntary Disclosure Strategies for Insiders

Abstract

Asymmetric information between corporate insiders and other market participants can lead to large bid-ask spreads or even a total collapse of trade in financial markets. In this paper, we discuss how the adverse selection problem can be remedied by voluntary disclosures by insiders. When disclosure decisions are made after the insiders become informed, the market participants update their priors both on the information disclosed and the information not disclosed. Insiders then give up some or all of their information advantage to (weakly) increase their profits. These results do not rely on ex ante commitments on the part of the insiders.

JEL Classification: M41, M45, D82, G10