Disclosure Dynamics and Investor Learning

This paper examines the effects of investors' learning of unknown underlying firm profitability on the dynamics of managers' voluntary disclosure decisions. I structurally estimate a voluntary disclosure model in which investors learn profitability over multiple years from management earnings forecasts and realized earnings. The results suggest that investor learning induces persistent disclosure incentives. Other things equal, a 10% change in the likelihood of disclosure caused by shocks to investors' beliefs about profitability is associated with a 10% change in the likelihood of disclosure in the next year. In addition, disclosure is more likely when investors' beliefs about profitability are more pessimistic relative to the true profitability or investors are more uncertain about their beliefs. This paper enriches the understanding of the role of investor learning of unknown parameters in driving disclosure decisions. In doing so, it also provides an economic explanation for the observed ''stickiness'' of managers' disclosure decisions.