Leaks, Disclosures and Internal Communication

We study how leaks affect a firm's communication decisions and real efficiency. A privately informed manager strategically chooses both public disclosure and internal communication to employees. Public disclosure is noisy, but in the absence of leaks, internal communication is perfectly informative because it maximizes employee coordination and efficiency. The possibility of public leaks distorts these choices: we show that more leakage worsens internal communication and can reduce real efficiency, despite increasing public disclosure. We discuss the implications of our results for recent regulations that protect and encourage whistleblowers in financial markets.