A Cognitive Theory of Corporate Disclosures


  • I am especially grateful to an anonymous referee for many insightful suggestions. I also thank Harriet Bergmann, Utpal Bhattacharya, Alon Brav, Michael Brennan, Sugato Chakravarty, Tony Daglish, Kent Daniel, Laura Frieder, Simon Gervais, Julia Grant, Michel Habib, Puneet Handa, Thorsten Hens, Ravi Jain, Kose John, Bruce Johnson, Padma Kadiyala, Ron Kaniel, Pete Kyle, Michael Long, Maureen O'Hara, Yiming Qian, Tom Rietz, Peter Ritchken, Michael Roberts, Richard Roll, Alan Shapiro, Kaveri Subrahmanyam, Marti Subrahmanyam, Robert Whitelaw, Tracie Woidtke, Daniel Wolfenzon, and seminar participants at New York University, Case Western Reserve University, Duke University, University of Iowa, and the University of Zürich, for stimulating feedback and/or for encouraging me to explore this topic.


I analyze how disclosure policies and managerial cognitive abilities interact to influence stock prices, firm values, and the liquidity of financial markets. High cognitive ability assists in value-creation within private corporations, but also may enhance the success odds of strategies which mislead large numbers of financial market agents who have access to firms' disclosure statements. Thus, the equilibrium degree of misrepresentation in disclosures can increase with managerial cognitive capacity (or intellect). Equilibrium efforts at improving true expected values of firms are limited by expected gains from misrepresentation. I argue that agents may face very high costs of acquiring information in firms run by managers who are effective at misrepresenting their firms in disclosure statements. This indicates that contrary to extant theoretical literature, there may be a positive relation between liquidity and the degree of information asymmetry between management and outside investors.