Learning to Disclose: Disclosure Dynamics in the 1890s Streetcar Industry

Abstract

We study the descriptiveness of the “unravelling” prediction in the 1890s streetcar industry. In this historical setting, capital-intensive streetcar companies gain the opportunity to disclose their earnings to dispersed investors via a new, quarterly newspaper supplement. We document that a quarter of the companies withhold their earnings from the first supplement, inconsistent with the “unravelling” prediction. However, almost all these companies start disclosing within the next couple of supplements, with the relatively-better companies among the remaining non-disclosers initiating disclosure and leaving the pool of non-disclosers each quarter. We interpret these stylized facts through the lens of a disclosure model featuring level-k thinking. Our model estimates that a substantial share of the companies employs a lower level of strategic thinking in the first supplement. This deviation from rational expectations appears to explain the initial failure of the “unravelling” prediction. Over time, companies appear to adopt higher levels of thinking, contributing to the rapid convergence to an (almost) full disclosure equilibrium. Collectively, our evidence is consistent with market forces yielding an (almost) full disclosure equilibrium in the medium to long run through repetition and learning.