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The kind of silence: managing a reputation for voluntary disclosure in financial markets

Author

Listed:
  • Miles B. Gietzmann

    (Bocconi University)

  • Adam J. Ostaszewski

    (London School of Economics and Political Sciences)

Abstract

We create a continuous-time setting in which to investigate how the management of a firm controls a dynamic choice between two generic voluntary disclosure decision rules (strategies) in the period between two consecutive mandatory disclosure dates: one with full and transparent disclosure termed candid, the other, termed sparing, under which values only above a dynamic threshold are disclosed. We show how parameters of the model such as news intensity, pay-for-performance and time-to-mandatory-disclosure determine the optimal choice of candid versus sparing strategies and the optimal times for management to switch between the two. The model presented develops a number of insights, based on a very simple ordinary differential equation characterizing equilibrium in a piecewise-deterministic model, derivable from the background Black–Scholes model and Poisson arrival of signals of firm value. It is shown that in equilibrium when news intensity is low a firm may employ a candid disclosure strategy throughout, but will otherwise switch (alternate) between periods of being candid and periods of being sparing with the truth (or the other way about). Significantly, with constant pay-for-performance parameters, at most one switching can occur.

Suggested Citation

  • Miles B. Gietzmann & Adam J. Ostaszewski, 2023. "The kind of silence: managing a reputation for voluntary disclosure in financial markets," Annals of Finance, Springer, vol. 19(4), pages 419-447, December.
    • Handle: RePEc:kap:annfin:v:19:y:2023:i:4:d:10.1007_s10436-023-00430-5
    DOI: 10.1007/s10436-023-00430-5
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    References listed on IDEAS

    as
    1. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-483, December.
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    4. Viral V. Acharya & Peter DeMarzo & Ilan Kremer, 2011. "Endogenous Information Flows and the Clustering of Announcements," American Economic Review, American Economic Association, vol. 101(7), pages 2955-2979, December.
    5. Ilan Guttman & Ilan Kremer & Andrzej Skrzypacz, 2014. "Not Only What but Also When: A Theory of Dynamic Voluntary Disclosure," American Economic Review, American Economic Association, vol. 104(8), pages 2400-2420, August.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Asset-price dynamics; Voluntary disclosure; Dynamic disclosure policy; Markov piecewise-deterministc modelling; Corporate transparency reputation;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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