Implications of strategic disclosure of favourable news for capital markets-based research

This paper derives the implications of strategic disclosure for the earnings-returns relation within a setting derived from Dye (1985), Jung and Kwon (1988), and Ohlson (1995), in which firms' managers disclose favourable earnings forecasts and withhold unfavourable earnings forecasts. It shows that such strategic disclosure by managers leads to concavity in the relation between contemporaneous reported accounting earnings and stock returns. This paper hence provide a new and intuitive explanation for the concavity in this relation reported in empirical studies.