A Theory of Disclosure in Speculative Markets

This paper presents a theory of disclosure in a market where investors have heterogeneous beliefs and face short-sale constraints. Assets trade above fundamentals reflecting the value of the option to sell to more optimistic investors in the future. The initial seller has an incentive to commit to an imprecise disclosure policy, despite the negative effect this has on the fundamental value of the asset, in order to increase the potential for disagreement and hence the magnitude of the speculative premium. I show that there is a strategic complementarity between sellers in their disclosure decisions. This explains why financial misreporting and episodes of speculation occur together in waves and demonstrates that the endogenous choice of imprecise disclosure amplifies the extent to which assets are overpriced. ∗Columbia Business School, Columbia University. ah2692@gsb.columbia.edu. I would like to thank Daron Acemoglu, Ricardo Caballero, Mathias Dewatripont, Emmanual Fahri, Michael Fishman, Ravi Jagannathan, Charles Jones, Stavros Panageas, Annette Vissing-Jorgensen and seminar participants at DePaul University, MIT, Northwestern (Kellogg), Wharton, and The Chicago-Minnesota Accounting Theory Conference for useful comments. I thank Tara Philip for outstanding research assistance. Any errors are my own.