Public Disclosures and Information Asymmetries: A Theory of the Mosaic

We develop a model to analyze the impact of public disclosure on price efficiency and information asymmetry. We provide support for the positive association between public disclosure and information asymmetry documented by many empirical papers. Our model allows us to identify settings in which public disclosure policies can enhance the mosaic of information, allowing informed traders to improve the precision of their private information while simultaneously increasing the amount of information impounded in price. Depending on the weights managers place on share price versus private benefits, they may optimally choose no disclosure, partial disclosure, or full disclosure. Interestingly, partial disclosure is never sustainable if managers care only about private benefits. If informed traders are limited to private information that is non-material only (i.e., information that does not change their current valuation of the firm), non-disclosure is never optimal. Finally, when managers have a duty to disclose negative news, overall disclosure may either increase or decrease.