Disclose or Not?--The Voluntary Disclosure Strategy under Reputation Effect

This paper utilizes a multi-period adverse selection model to analyze the behaviors of a manager making voluntary disclosure policy under his (her) reputation consideration. After observing the released information by a manager in multiple periods, investors will update their recognitions of the manager’s ability and give valuation to the manager. To maximize his (her) own compensation, the manager decides whether to make a preemptive announcement or not. We find that there exists a unique non-degenerate equilibrium with no separating solution which implies that both high and low ability managers will make voluntary disclosure. The analyses further show three main reputation effects that can explain a manager’s discretionary disclosure behavior: the feedback, the direct reputation, and the signaling effects. We conclude that the manager will have an aggressive disclosure policy for the manager having higher reputation and ability. Our analyses also provide the reputation maintenance as an alternative explanation for a manager’s action to disclose bad news.