Public Information and Market Skepticism of Voluntary Disclosure
We examine the impact of public information on firms’ disclosure strategies. We portray two regimes based on a model that extends the setting of Dye (1985) and Jung and Kwon (1988). In the first regime, the firm is able to respond to public information and thus has the last word, and in the second the firm’s hands are tied so that it cannot respond even though it anticipates the public disclosure and the market’s price response. We find existence of equilibrium with cutoff strategies in each regime; a firm will disclose when it receives a signal greater than the cutoff. A unique equilibrium exists when the distribution of public information has no moving support, satisfies the monotone likelihood ratio property, and is either weakly concave or convex in the state of the firm. We compare the firm’s voluntary disclosure strategy in each regime to the benchmark of no public information. The results of this comparison for the two regimes give us a more robust interpretation of archival data