Optimal Disclosure and Fight for Attention

Abstract

This paper presents a model in which a manager voluntarily discloses precision information in addition to fundamental information about firm profitability. The firm's stock price guides its real investment decision and the informational content of the price is affected by the voluntary disclosure decision, because informed trading is endogenous. We highlight a novel trade-off: on the one hand, more precise public information crowds-out traders' private information acquisition because it levels the playing-field. On the other hand, there can also be a novel crowding-in effect because high-precision disclosures indicate greater managerial confidence and thus higher investment, which increases the traders' value of private information. For positive fundamental information the net effect is ambiguous, for negative information the crowding-out effect dominates.