Voluntary Disclosures, Corporate Control, and Investment


  • We thank Abbie Smith (Editor) and an anonymous referee for many insightful comments. We also thank Ken Binmore, Ron Dye, Michael Fishman, Frank Gigler, Jonathan Glover, Ilan Guttman, Milton Harris, Thomas Hemmer, Chandra Kanodia, Pierre Liang, Karen Nelson, K. Ramesh, Sri Sridharan, Dan Weiss, workshop participants at Carnegie Mellon University, Hebrew University, IDC, the University of Oklahoma, University of Minnesota, Rice University, and Texas A&M University for helpful comments and discussions. The second author, Nisan Langberg, would like to acknowledge the generous support and assistance of Tel Aviv University and financial support from the Henry Crown Institute of Business Research in Israel during the period in which work on the paper was done and while on leave from the University of Houston.


We examine the valuation and capital allocation roles of voluntary disclosure when managers have private information regarding the firm’s investment opportunities, but an efficient market for corporate control influences their investment decisions. For managers with long-term stakes in the firm, the equilibrium disclosure region is two-tailed: only extreme good news and extreme bad news is disclosed in equilibrium. Moreover, the market’s stock price and investment responses to bad news disclosures are stronger than the responses to good news disclosures, which is consistent with the empirical evidence. We also find that myopic managers are more likely to withhold bad news in good economic times when markets can independently assess expected investment returns.