No. 211: Behavioral Dynamics of Disclosure Timing

We examine a dynamic disclosure model where a manager interacts with a representative investor who exhibits loss aversion under Prospect Theory. A key focus of our analysis is the strategic timing of disclosure decisions in response to biased capital markets. We find that when facing such bias, the manager will disclose moderately bad news more promptly to dampen the negative price effect resulting from loss aversion, even if that means foregoing a higher nondisclosure price. This contrasts with previous findings of delayed disclosure in models with pending news and suggests that asymmetries in the timeliness of disclosing good versus bad news can arise endogenously as an optimal strategy. Empirically, we investigate how loss aversion influences disclosure timing using analyst forecasts and price target revisions. We find that firms facing higher loss aversion issue management guidance more frequently and release bad news more promptly. Furthermore, we document that preemptive disclosure is associated with a mitigated negative market response to bad news in the presence of prospect-theoretic markets. Our findings offer new insights into capital market effects of reporting asymmetries and the strategic timing of disclosures, adding to the literature on the behavioral foundations of financial reporting.