Voluntary Disclosure, Price Informativeness, and Efficient Investment


Speaker


Abstract

I analyze a manager's decision to disclose private information when the stock market is a source of information for corporate investment-making. A manager with long-term incentives discloses her private information only if it crowds-in informed trading and thus increases the manager's ability to learn from the market. However, this ex-post disclosing behavior results in two crowding-out effects: First, it crowds-out informed trading in situations where the manager withholds her private information. Second, voluntary disclosure results in an ex-ante average decline in price informativeness. Paradoxically, ex-post voluntary disclosure aimed at stimulating informed trading distorts the market's feedback-providing role and restrains efficient investment-making. Long-term incentives induce this disclosing behavior and thus cause a novel form of investment inefficiency.

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