Selective and Aggregate Disclosure

Abstract

We study the disclosure strategy of a firm's manager who may privately observe two signals that are informative about the firm's prospects. The two signals correspond to the firm's two business segments and are observationally correlated, i.e. the observation of one affects the likelihood of observing the other. If the manager makes a separate disclosure of each signal, we show that, there exists a selective disclosure equilibrium where the manager is falsely modest; i.e. he suppresses favorable information even if it is his only information. We then demonstrate that this equilibrium may result in lower welfare than an aggregate disclosure regime, where the manager is restricted to disclosing the aggregate of the two signals, even though it garbles information.

Keywords: Disclosure, Accounting aggregation, False modesty

JEL Classification: M41, M45, D82