No. 90: Information leaks and voluntary disclosure

Abstract

We study managers’ decisions to voluntarily disclose information to the capital market when they face a risk of information leakage. Our analysis offers three main insights. First, we find that leaks that are less informative create market discipline and motivate more voluntary disclosure. Second, an increasing likelihood of information leakage has ambiguous effects. It fosters market discipline but increases managers’ rewards from successful nondisclosure. Consequently, a higher likelihood of leakage impedes disclosure if leaks represent rare events and fosters voluntary disclosure if leaks are sufficiently probable. Third, we find that market discipline is more effective for myopic managers who focus on short-term prices and cannot react to information leaks on a timely basis. Such managers are willing to preempt iinformation leakage and to disclose their private information.