Optimal Disclosure to a Confirmation-Biased Market

Abstract

A vast literature considers disagreements amongst traders about firm value. Of equal importance, however, are the disagreements between traders and firm management. In this paper, we investigate a manager's incentives to disclose information to traders who are more (or less) optimistic. Traders overweight disclosures that confirm their existing priors. Paradoxically, managers may disclose more information to traders who already believe that the firm's value is high, exacerbating mis-pricing of the firm's stock. We also find that managerial myopia might lead to more information disclosure and that it strictly exacerbates mis-pricing.