Managerial Overoptimism and Discretionary Disclosure

ABSTRACT We examine the effect of managerial overoptimism on discretionary disclosure of subjective information, such as earnings forecasts. The market applies a discount upon disclosure to capture the possibility that the revealed subjective expectation is too optimistic. While this discount is correct on average, it is too high (low) for a truly objective (overoptimistic) manager. Consequently, overoptimistic managers disclose more frequently, and their firms are overvalued. We show that higher levels of overoptimism or a greater fraction of overoptimistic managers amplify the market discount, which ultimately reduces overall disclosure in equilibrium.