Discretionary disclosures to risk-averse traders

Verrecchia (1983) investigates managers’ incentives for costly, discretionary disclosure of their information to risk-averse traders when the functional form of prices is exogenously specified. We extend Verrecchia (1983) by deriving the endogenously determined prices that would arise when all traders have constant risk tolerance. We show that these endogenously determined prices are inconsistent with the assumed prices in Verrecchia (1983) when managers elect to not disclose. We then derive the manager’s disclosure strategy for our augmented setting. We also extend the results in Verrecchia (1990) for risk neutral traders to a market where traders have constant risk tolerance and prices are endogenously derived. Further, in our setting, discretionary disclosure does not affect how traders price risk of different outcomes. Finally, we explain the empirical market reaction to a confirmatory management forecast.