On the Disclosure of Half-Truths and the Duty to Update

Abstract

We develop a model of a manager’s equilibrium voluntary disclosure policy to study how that policy changes depending on whether the manager is prohibited from disclosing, or allowed to disclose, a half-truth; we also examine how the disclosure policy changes depending on whether the manager has a duty to update past disclosures. Among our results, we show that if a manager is prohibited from issuing half-truths, the manager discloses a wider array of information than if the manager is allowed to issue half-truths, and investors view the absence of disclosure more skeptically; we also show that imposing a duty to update on the manager does not affect the manager’s initial disclosures, but it results in the manager disclosing uniformly more information over time. This paper was accepted by Brian Bushee, accounting.