How to Create a Hype. Voluntary Disclosure of Partially Verifiable Information

We consider voluntary disclosure of nonproprietary information. Established research knows two classes of models. Some authors assume that the manager can be fined prohibitively high if she lies. Others assume that no punishment can be imposed. We generalize and unify those approaches and investigate an intermediate class of models. Our main result is that a clustering of reports may occur. First, if a detected misreport is modestly punished, favorable types uniformly report to be the most favorable one. In that case some types free ride on the even better types, thus gaining from the bias of their report. Second, for high punishments, a rational investor will be able to ‘read’ the manager’s bias for intermediate types. In that case he infers the truth from the observed lie. Thus, a misreport is harmful to the manager as she bears the risk of being fined. Third, if there is no upper bound on the misreport, types may cluster stepwise such that investors again cannot read the manager’s report precisely. JEL Classification: M4, G14, C72 ∗Authors’ address: Department of Accounting and Control, University of Tübingen, Nauklerstraße 47, D-72074 Tübingen, Germany