Is There More Voluntary Disclosure if Investors are Better Informed?

Abstract

In this paper, the interaction between the investor’s knowledge about a manager’s information endowment interacts and their ability to gauge the manager’s exact information content upon voluntary disclosure is studied. If investors are unable to discern anything beyond the manager’s information endowment, the probability that the investor is well informed correlates positively with the probability of voluntary disclosure. However, in lieu of extant research we find that, if investors are able to ascertain the manager’s private information as well as the information endowment, the results are opposite: the probability of non-disclosure as the probability that investors are well-informed increases. The results have implications for both empirical researchers and regulators: They show that the incentives for voluntary disclosure provided by rational expectations are highly sensitive to the levels of sophistication of the investors or the informational environment in a given market–in highly sophisticated markets we expect to see relatively little voluntary disclosure by firms because they don’t have to fear adverse reactions to non-disclosure.