Companies face a constant choice: reveal what they know or conceal it. The decision seems straightforward—greater disclosure, by satisfying regulators and reassuring markets, should reduce uncertainty and raise stock prices, on average. Yet the reality is more complex. Sometimes, the strategic decision to remain silent can lead to higher average prices than with full disclosure. The key lies in a subtle interplay between what investors already know and why firms withhold the information they may have.

Stock prices don’t just reflect what firms announce—they’re also shaped by the trading activities of investors who dig up information through industry contacts, data analysis, or market signals. When companies weigh whether to disclose, they must account for how such informed investors might interpret their silence. The resulting decisions and their impact on prices can appear counterintuitive and have important implications for regulatory policy. 

The Disclosure Decision

Consider a CEO who may have advanced knowledge of the company’s next earnings report. She can share it publicly, incurring costs like legal fees and regulatory or competitive risks, or stay silent and let the market speculate. With positive news, disclosure is the likely move—stock prices rise, confidence grows. But if the outlook is bleak, silence often prevails. 

What’s key is how the reason for partial disclosure affects market outcomes. Two scenarios dominate: disclosure might be too costly (say, revealing a trade secret), or the CEO might lack firm information to share (imagine a biotech awaiting trial data). These aren’t just theoretical quirks—they’re practical considerations that determine whether potential silence lifts or sinks a company’s stock.

The Cost of Staying Quiet

First, take the case where the CEO is surely informed, but disclosure is costly. A tech firm might withhold details of a lucrative new product to shield it from rivals, or an energy company might redact contract terms in regulatory filings. While this silence can be prudent for the firm, investors may still interpret it cautiously. They reason that if the news were sufficiently positive that its immediate disclosure benefits (e.g., a stock surge) clearly outweighed strategic costs (like tipping off rivals), the firm would likely disclose. Hence, they view the stock as a risky bet with capped upside. To be compensated for this “downside risk,” investors are only willing to hold the stock when its price is lower. As a result, the stock ends up trading below what the company’s cash flows suggest it is worth.

This discount is larger when investors face larger uncertainty, either because they are not well informed about the firm or because prices are volatile. In effect, this amplifies the penalty for silence and firms respond by releasing more information. In contrast, when investors are well informed, the benefit from disclosure is low since, even absent disclosure, the price closely reflects the firm’s true value.

The Upside of Uncertainty

Now consider the other case: the CEO may not have news to share. A pharmaceutical firm might be waiting for clinical results, with no update to offer. Here, silence doesn’t necessarily imply failure. Investors recognize that the company may simply be uninformed rather than concealing bad news. In fact, investors are exposed to “upside risk”—given no disclosure, there is a chance that the eventual news is a windfall. The allure of this upside potential can lead informed investors to bid up the stock price beyond the firm’s expected value. 

When investors are better informed, there is less uncertainty about future payoffs, which reduces the potential upside and associated price premium; hence, for the firm, the benefit from remaining silent is lower. As a result, firms are more likely to disclose when investors have better information, in contrast to the case where nondisclosure is driven by costs. 

Public Information: Ally or Obstacle?

Regulators often champion disclosure mandates—think SEC filings or new ESG disclosure requirements—as a way to help investors by leveling the playing field. However, a common pushback is that mandating disclosures can stifle or “crowd out” firms’ incentives to voluntarily provide information and potentially reduce the overall information available to investors. The traditional argument is that, once firms are compelled to meet a mandated disclosure baseline, the marginal price benefit achievable through additional, voluntary disclosures is lower, which reduces their incentives to engage in such behavior. 

We show that such “crowding out” need not arise when investors are privately informed, and in fact, disclosure mandates can compel firms to provide more information voluntarily. The idea is that more public information leads investors to downweight their private signals, which can raise uncertainty by making market prices less informative. If the overall impact of mandated disclosures is to increase investor uncertainty and disclosures are costly, then this can lead to larger price discounts for nondisclosure and thus a stronger incentive for firms to disclose. On the other hand, if the CEO is potentially uninformed and better public information reduces investor uncertainty, then the price premium for remaining silent is lower and firms choose to disclose more often. Thus, in both cases, as the figure below illustrates, better public information can lead to more voluntary disclosures.

Takeaways

Our results show that the relationship between firms’ voluntary disclosure choices and public and private information quality depends crucially on the frictions that drive nondisclosure. For policymakers, this illustrates a potential downside to one-size-fits-all rules. Depending on how investors interpret silence, more stringent disclosure requirements can lead some firms to reveal more information voluntarily but lead others to conceal more. 

While it may be challenging to pin down the relevant friction in general, it is clear which force is more important in some cases. For instance, redactions in contract disclosures, withholding information about segment-level performance, and nondisclosure of details about filed patents are likely to be examples in which the firm has information but chooses not to disclose it. However, for firms with substantial market power or highly differentiated product lines, the competitive costs of disclosing information are likely to be low, and so nondisclosure is likely to be driven by a lack of information.