Interim Disclosure and Public Forecasts: An Economic Analysis and a Framework for Choice.

Abstract ABSTRACT: This paper develops an (equilibrium) model of financial markets in which investors have only imperfect information about each other and hence can only make imperfect inferences (of what others know) from price changes. Search for (undisclosed) interim information about firms is time-consuming (costly); moreover, abilities to conduct fruitful search differ among investor groups. Under a "market" solution it is shown that there are clear incentives for search by those with unusual detective abilities and/or large resources. Offsetting this are strong incentives for voluntary disclosure by firms, but it is noted that these need not result in socially desirable disclosure decisions. A natural "cost-benefit" criterion for deciding whether required disclosure would be beneficial is identified which, in may cases, can be applied on the basis of very little information. The economic inefficiencies that may result from the use of "incorrect" criteria in establishing disclosure requirements, such as "full disclosure" or majority rule, are also identified.