Informational Feedback Effect, Adverse Selection, and the Optimal Disclosure Policy

Pingyang Gao, Pierre Jinghong Liang
2011 Social Science Research Network  
Trading in a secondary stock market not only redistributes wealth among investors but also generates information that guides subsequent real decisions. We provide a disclosure model that re ‡ects both functions of the secondary market. By partially preempting traders' information advantage established from information acquisition, disclosure reduces incentives for private information acquisition. The resulting reduction in information acquisition has two opposite e¤ects on ...rm value. On one
more » ... nd, it narrows the information gap between informed and uninformed traders and improves the liquidity of ...rm shares. On the other hand, it reduces the informational feedback from the stock market to real decisions. The optimal disclosure policy is determined by the trade-o¤ between liquidity enhancement and the investment e¢ ciency. The model explains why the ...rm value could be higher in an environment that promotes disclosure and private information production at the same time and why growth ...rms are endogenously more opaque than value ...rms. JEL classi...cation: G14, K22, M41, M48
doi:10.2139/ssrn.1780462 fatcat:5f4kt3d4hrefve6g2knaqhyqv4