Forward-Looking and Backward-Looking Disclosure: Investor Disagreement and Market Liquidity

We study how forward-looking and backward-looking disclosures affect investor disagreement, trading volume, and bid-ask spreads. Using a rational-expectations model with common priors, we demonstrate that the same state-informative disclosure can have sharply different effects depending on whether it arrives before or after a relevant managerial action. The key distinction is whether disclosure impacts only beliefs about the consequences of particular firm policies or whether the disclosure also provides information about the policy the firm is likely to choose. When the disclosure arrives first, it plays a forward-looking role: it coordinates investors’ beliefs about the action the firm is about to take while leaving heterogeneous beliefs about whether that action matches the state. Disagreement therefore emerges, private information becomes valuable for trade, trading volume rises, and bid-ask spreads widen. When the same disclosure arrives after the firm’s action is publicly known, it plays a backward-looking role: it only provides additional public information about whether the observed action was correct, compressing disagreement in expectation. Informed investors remain active before and after a backward-looking disclosure, so volume is unchanged while the adverse-selection component of the spread narrows in expectation. The results imply that theoretical and empirical work on disclosure should distinguish disclosures tied to pending firm decisions from disclosures released after those decisions are made public.