Information Provision in a Biased Market
33 Pages Posted: 1 Mar 2019 Last revised: 6 Jan 2021
Date Written: February 10, 2019
A vast literature considers disagreements amongst traders about firm value. Of equal importance, however, are the disagreements between traders and firm management. In this paper, we investigate a manager's incentives to disclose information to traders who are more (or less) optimistic. Traders overweight disclosures that confirm their existing priors. Paradoxically, managers may disclose more information to traders who already believe that the firm's value is high, exacerbating mis-pricing of the firm's stock. We also find that managerial myopia might lead to more information disclosure and that it strictly exacerbates mis-pricing.
Keywords: information disclosure, price efficiency, behavioral finance.
JEL Classification: G14, G41.
Suggested Citation: Suggested Citation