A Theory of Corporate Communication

Abstract

How should we expect firms to communicate with their shareholders in the presence of uncertainty? This paper studies a model of corporate communication in which cash flow variance is priced and stochastic. The model rationalizes "biases" for reports that are internally consistent and confirm market priors. Managers prioritize consistency over confirmation when cash flows have higher variance or when the signal space is larger. Ex-ante, managers prefer larger signal spaces to smaller ones. Complementary notions of dissociation and divergence arise in settings with priced, stochastic covariance (e.g., one-factor SDF, multiple segments, multiple firms). The model makes several cross-sectional predictions.

Keywords: corporate communication, signal jamming, uncertainty JEL: C11, D83, G14, M41

JEL Classification: C11, D83, G14, M41