No News is Good News: Voluntary Disclosure in the Face of Litigation

This paper studies dynamic disclosure when the firm value evolves stochastically over time. The presence of litigation risk, arising from the failure to disclose unfavorable information, not only prompts bad news disclosures but also crowds out good news disclosures. The manager’s disclosure policy and the overall amount of information transmission depend on the persistence of shocks, as managers may delay the release of negative information in an attempt to bet for resurrection. From a policy perspective, we show that a harsher legal environment may be a cost-effective way of stimulating information transmission in settings where the nature of information is highly proprietary.