We study the resource allocation role of voluntary disclosures when feedback from financial markets is potentially useful to managers in undertaking value maximizing actions. Managers weigh the short‐term price implications of disclosure against the long‐term efficiency gains due to feedback while financial analysts strategically produce information. The model can explain why managers disclose bad information (e.g., grim outlook), that reduces the stock price, and why prices respond more strongly to bad news relative to good news. We find that not all firms enjoy the same quality of feedback, and that feedback, by itself, does not induce more disclosure but less.

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. * University of Houston; † Texas A&M University. Accepted by Abbie Smith. We thank Abbie Smith (Editor) and an anonymous referee for many insightful comments. We also thank

Inefficient investment allocation induced by corporate fraud, where informed insiders strategically manipulate outside investors' beliefs, has been endemic historically and has recently attracted much attention. We reconcile corporate fraud and investment distortions with efficient capital markets, building on shareholder-manager agency conflicts and investment renegotiation in active takeover markets. Because investments that are ex post inefficient are not renegotiation proof, the optimal renegotiation-proof contract induces overstatements by managers, accompanied by overinvestment in low return states and underinvestment in high return states by rational investors. Our framework also helps explain why easy access to external capital appears to facilitate corporate fraud. Copyright (c) 2009, RAND.

We analyze the voluntary disclosure decision of a manager when analysts scrutinize the quality of disclosure. We derive an equilibrium in which managers voluntarily disclose unfavorable information only if sufficiently precise, but disclose favorable news with lower levels of accuracy. We show that analysts cover good news disclosures with higher scrutiny. To the extent analysts rely on mandatory financial reports to interpret voluntary disclosures, we show that more precise financial reports may lead to more precise but less frequent voluntary disclosures. Moreover, a slant toward conservatism in financial reports can lead to less precise yet more frequent voluntary disclosures. r 2007 Elsevier B.V. All rights reserved.JEL classification: G14

We analyze the voluntary disclosure decision of a manager when analysts scrutinize the quality of disclosure. We derive an equilibrium in which managers voluntarily disclose unfavorable information only if sufficiently precise, but disclose favorable news with lower levels of accuracy. We show that analysts cover good news disclosures with higher scrutiny. To the extent analysts rely on mandatory financial reports to interpret voluntary disclosures, we show that more precise financial reports may lead to more precise but less frequent voluntary disclosures. Moreover, a slant toward conservatism in financial reports can lead to less precise yet more frequent voluntary disclosures. r 2007 Elsevier B.V. All rights reserved.JEL classification: G14