The Sound of Silence: equilibrium filtering and optimal censoring in financial markets

TL;DR

This paper develops a filtering framework for valuing firms in financial markets where investors have partial, randomly timed observations, and agents can strategically withhold disclosures, affecting market valuations.

Contribution

It introduces explicit filtering formulas for valuation adjustments under strategic withholding of information in both single and multiple firm settings.

Findings

Derived explicit filtering formulas for valuation updates.

Analyzed impact of withholding disclosures on firm valuation.

Extended analysis to multiple co-dependent firms.

Abstract

Following the approach of standard filtering theory, we analyse investor-valuation of firms, when these are modelled as geometric-Brownian state processes that are privately and partially observed, at random (Poisson) times, by agents. Tasked with disclosing forecast values, agents are able purposefully to withhold their observations; explicit filtering formulas are derived for downgrading the valuations in the absence of disclosures. The analysis is conducted for both a solitary firm and m co-dependent firms.