The Asset Pricing and Real Implications of Relationship Intensity Disclosure

68 Pages Posted: 6 May 2022 Last revised: 6 Feb 2025

See all articles by Xu Jiang

Xu Jiang

Duke University

Jordi Mondria

University of Toronto - Department of Economics

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: February 05, 2025

Abstract

Investors in financial markets are often uncertain about the relationship intensity between firms and have to rely on firms' disclosure of such relationship intensity. We analytically study the asset pricing implications of this relationship intensity uncertainty and how such uncertainty affects firms' incentives to form and disclose their relationship intensities (i.e., the real implications). We find that while such disclosure has a positive price impact by increasing the expected cash flow, it also has a negative impact by reducing the diversification benefit of investing in multiple firms that have more correlated cash flows. The price impact upon relationship intensity disclosure is therefore not monotone: it increases with the expected benefit of relationship and decreases with the risk of the underlying relationship. Our analysis implies that mandatory disclosure of firm relationship intensities may both destroy relationship development and reduce investor welfare, i.e., has adverse real consequences.

Keywords: firm relationships, asset prices, disclosure, matching quality, collaboration intensity

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JEL Classification: D82, G14, G18, M41, M45

Suggested Citation

Jiang, Xu and Mondria, Jordi and Yang, Liyan, The Asset Pricing and Real Implications of Relationship Intensity Disclosure (February 05, 2025). Available at SSRN: https://ssrn.com/abstract=4099036 or http://dx.doi.org/10.2139/ssrn.4099036

Xu Jiang (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Jordi Mondria

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
1-416-978-1494 (Phone)

HOME PAGE: http://individual.utoronto.ca/jmondria/

Liyan Yang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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