Insider trading and the voluntary disclosure of information by firms

We examine the voluntary disclosure policy of a firm where the manager has private information and opportunities to trade on it. The equilibrium discl osure policy ranges from full disclosure to partial disclosure to nondisclo sure 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 mo re likely to sell than buy shares, two results for which there is ample emp irical support. The likelihood and amount of voluntary disclosure increases with the manager's pay-performance sensitivity, firm quality, and the numb er of insiders privy to the information and decreases with market liquidity . Stringent enforcement of insider trading regulations induces more disclos ure by firms whereas the short sales prohibition on insiders induces less d isclosure. (C) 2000 Elsevier Science B.V. All rights reserved.