Public Disclosure and the Structure of Private Information Markets

This study investigates the relationship between private information markets and the disclosure policies of publicly traded firms.1 The main point of the paper is that the structure of private information markets is crucial in determining investor demand for information disclosures. The value of public disclosure to traders is shown to vary dramatically with the structure of the private information market. It is also demonstrated that if firms are given the power to alter the structure of the private information market through selective private disclosures of information before any public release, traders may be made better off. These results are consistent with empirical observations regarding the public release of management earnings forecasts. It is observed that firms may privately inform securities analysts of earnings forecasts before public release (if any), apparently influencing the structure of the private information market. In the mid 1970s, the SEC, in response to this practice, attempted to mandate forecast disclosures. But this SEC action was strongly op-