News Management and the Value of Firms

The literature on asymmetric information has been concerned mainly with the problem of the informed party lying to the uninformed parties. However, in many cases, the informed party will stop short of lying but will seek to gain from private information by managing the disclosure of news. This article examines the pricing of a firm when there is such manipulation of news. I model this situation as a variant of the "persuasion game" of Milgrom and Roberts (1986) in which I can parameterize the notion of the degree of credence placed by the market on the disclosures of the informed party . An empirical hypothesis thrown up by the theory is that for otherwise identical firms, a low price/earnings ratio will be associated with a greater degree of positive skewness of the disclosure strategy.