Public Disclosures and Information Asymmetry: A Theory of the Mosaic

We model an information mosaic in which multiple signals-one gathered by an informed trader and the other publicly disclosed by the manager of the firm-are combined to estimate firm value. Under testable conditions, voluntary disclosures lead to higher ex ante information asymmetry and expected profits for the informed trader by allowing him to refine his trading strategy and complete his information mosaic. The informed trader's ability to combine information and enhance his advantage is more prevalent when there is more uncertainty about whether the news is favorable or unfavorable, the manager is more likely to be informed, and the manager's information is precise (i.e., disclosure quality is high).