Public information in financial markets often arrives through the
disclosures of interested parties who have a material interest in the
reactions of the market to the new information. When the strategic
interaction between the sender and the receiver is formalized as a
disclosure game with verifiable reports, equilibrium prices can be given
a simple characterization in terms of the concatenation of binomial
pricing trees. There are a number of empirical implications. The theory
predicts that the return variance following a poor disclosed outcome is
higher than it would have been if the disclosed outcome were good. Also,
when investors are risk averse, this leads to negative serial
correlation of asset returns. Other points of contact with the empirical
literature are discussed.
KEYWORDS: Disclosure games, residual uncertainty, binomial trees.