Insider trading and the voluntary disclosure of information by ®rms

We examine the voluntary disclosure policy of a ®rm where the manager has private information and opportunities to trade on it. The equilibrium disclosure policy ranges from full disclosure to partial disclosure to nondisclosure depending on whether the manager's pay±performance sensitivity is high, medium or low, respectively. In the partial disclosure equilibrium, good news is more likely to be disclosed early than bad news and insiders are more likely to sell than buy shares, two results for which there is ample empirical support. The likelihood and amount of voluntary disclosure increases with the manager's pay±performance sensitivity, ®rm quality, and the number of insiders privy to the information and decreases with market liquidity. Stringent enforcement of insider trading regulations induces more disclosure by ®rms whereas the short sales prohibition on insiders induces less disclosure. Ó 2000 Elsevier Science B.V. All rights reserved. JEL classi®cation: G30; G38