Conservative Disclosure

We analyze a model of voluntary disclosure where investors impose a discount for uncertainty about firm value. We find a commitment to conservative reporting, defined as a requirement that firms disclose bad realizations of economic events, results in firm prices being higher on average. Intuitively, in the absence of mandatory disclosure requirements, managers have incentives to disclose voluntarily information about good realizations and withhold information about bad realizations. Thus, a financial reporting system that requires timely reporting of low realizations results in lower uncertainty and higher firm value. Importantly, we interpret a commitment to conservative reporting to include not only reported earnings, but more broadly any mechanism that commits managers to disclose, such as required footnotes and explanations in corporate filings. Beyond a capital market setting, our model also applies to other adverse selection settings - including governance, litigation, and debt contracting - where timely disclosure of bad news improves efficiency.