Mandatory and Voluntary Disclosures: Dynamic Interactions

Firms sometimes obtain soft private information about growth prospects along with hard information about current or past performance. In this environment, we find that optimizing disclosures over multiple periods yields nonlinear stock price reactions following both voluntary and mandatory disclosures. Further, we derive several predictions about distinct short-run and long-run effects of disclosures and nondisclosures on security prices. Under specified conditions, when the volatility of the firm's earnings increases, the average contemporaneous and prospective post-mandatory-disclosure market premia (for voluntary disclosures over nondisclosures) rise, while farther-in-future market discounts (for such voluntary disclosures) also become larger. Our analysis moreover predicts that both the disclosure probability and the information content of nondisclosures can increase in the persistence of earnings.