Optimal Disclosure to a Confirmation-Biased Market

31 Pages Posted: 1 Mar 2019

See all articles by Jordan Martel

Jordan Martel

Indiana University Bloomington - Kelley School of Business

Jan Schneemeier

Indiana University - Kelley School of Business

Date Written: February 10, 2019

Abstract

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

Martel, Jordan and Schneemeier, Jan, Optimal Disclosure to a Confirmation-Biased Market (February 10, 2019). Kelley School of Business Research Paper No. 19-17. Available at SSRN: https://ssrn.com/abstract=3332016 or http://dx.doi.org/10.2139/ssrn.3332016

Jordan Martel (Contact Author)

Indiana University Bloomington - Kelley School of Business ( email )

1309 E 10th Street, Hodge Hall 4100
Bloomington, IN 47405
United States

Jan Schneemeier

Indiana University - Kelley School of Business ( email )

1275 E 10th St
Bloomington, IN 47405
United States

HOME PAGE: http://www.jan-schneemeier.com

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