Disclosing to Informed Traders
77 Pages Posted: 6 Jan 2021 Last revised: 19 Sep 2022
Date Written: September 01, 2022
Abstract
We develop a model in which a firm's manager can voluntarily disclose to privately-informed investors. We show that, in equilibrium, the manager only discloses sufficiently favorable news. If the manager is known to be informed but disclosure is costly, the probability of disclosure increases with market liquidity and the stock trades at a discount relative to expected cash flows. However, when investors are uncertain about whether the manager is informed, disclosure can decrease with market liquidity, and the stock can trade at a premium relative to expected cash flows. Moreover, contrary to common intuition, ex-ante public information can crowd in more voluntary disclosure.
Keywords: Voluntary Disclosure, Trading, Price Efficiency, Private Information
JEL Classification: D72, D82, D83, G20
Suggested Citation: Suggested Citation