Optimal Firm (Non-)Disclosure

Abstract

We re-examine the seminal persuasion model of Dye (1985), focusing on the contracting power of current shareholders. Current shareholders determine the disclosure policy of a manager, who may be informed about the firm's value. Current shareholders desire higher future stock prices and dislike volatility. We show that the optimal policy is complete non-disclosure. The key intuition is that the disclosure policy cannot affect the expected future stock price, but can affect price volatility, which is minimized under non-disclosure. Our results extend to cheap talk settings and Bayesian persuasion games.