Information acquisition and the value of bad news

Abstract

When an interested party controls both the acquisition and the transmission of evidence and some of her information is unverifiable, a tension between selective revelation and benefits of transparency arises. The interested party might hence find it optimal to reveal unfavorable evidence even though disclosure is discretionary. While this revelation policy yields to more accurate decisions, informativeness is non monotone in the extent of voluntary disclosure. The model provides a rationale for adverse announcements such as product recalls and earning warnings and implications for mandatory disclosure laws.

Bad News Turned Good: Reversal under Censorship

“…Teoh and Hwang [1991], Marinovic and Varas [2016], and Corona and Randhawa [2018] show that bad news may be worth revealing in settings where they may with some probability be discovered by the receiver regardless. Thordal-Le Quement [2014] and Ispano [2018] show that revealing bad news can be used as a signal of the amount of information the sender possesses. Our paper provides a novel motivation for revealing bad reviews in the presence of a mixed audience.…”