Optimists, Pessimists, and Managerial Disclosures

Abstract

The objective of this paper is to explore the effects of analyst bias on the voluntary disclosure decisions of corporate managers. It is shown that when a manager believes that an analyst following his firm might be exhibiting undue optimism, he will grant the analyst access to his private information not only if it is favorable, but, potentially, also if it is sufficiently unfavorable. In contrast, when the manager believes that the analyst may be exhibiting undue pessimism, he will withhold access not only when the information is unfavorable, but, possibly, also when it is sufficiently favorable. These strategies differ not only from each other, but also from the optimal strategy in a setting without analyst bias. These differences make clear that any analysis of managerial disclosure strategies must take into account the possible biases of analysts and, by extension, the nature of the information currently in the possession of investors in the marketplace. The analysis also explores the effect of changes in the economy's parameters on the probability of managerial disclosure. Some of these results again differ from those obtained in a setting without analyst bias and have the potential of generating future empirical work.

JEL Classification: G29, D82, G14, M41