Optimal Disclosure to a Confirmation-Biased Market
31 Pages Posted: 1 Mar 2019
Date Written: February 10, 2019
We analyze a manager's optimal disclosure policy in a market in which some traders are confirmation-biased and ignore information inconsistent with their priors. The disclosed signal informs traders about the manager's unknown ability. By exerting costly effort, the manager can increase the precision of the disclosed signal and reveal more information to the market. The manager faces career concerns and maximizes the market's assessment of his ability. We find that more bias in the market leads to a more informative disclosure policy when traders overweight positive signals. Though some traders discard negative information, the overall market assessment can become more precise. Surprisingly, confirmation bias can reduce entrenchment and increase price efficiency and the expected firm value.
Keywords: managerial assessment, information disclosure, behavioral finance
JEL Classification: G14, G34, G41
Suggested Citation: Suggested Citation