Abstract

http://ssrn.com/abstract=1780462
 
 

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


Pingyang Gao


University of Chicago - Booth School of Business

Pierre Jinghong Liang


Carnegie Mellon University - Tepper School of Business; CAFR/SAIF

September 1, 2011

Chicago Booth Research Paper No. 11-13

Abstract:     
Trading in a secondary stock market not only redistributes wealth among investors but also generates information that guides subsequent investment. We provide a positive theory of disclosure that reflects both functions of a secondary market. By making private information public, disclosure reduces private information acquisition and levels the playing field. However, a leveled playing field has two opposite effects on firm value. On one hand, it ameliorates adverse selection among investors and improves the liquidity of firm shares. On the other hand, it could also impede investment efficiency because less information is produced by the market and used by decision makers. This trade-off determines the optimal disclosure policy. Our theory generates new testable predictions and reconciles disclosure with other parts of securities regulation that encourage private information production.

Number of Pages in PDF File: 32

Keywords: Disclosure, Securities Regulation, Adverse Selection, Informational Feedback Effect

JEL Classification: G14, K22, M41, M45

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Date posted: March 8, 2011 ; Last revised: February 21, 2012

Suggested Citation

Gao, Pingyang and Liang, Pierre Jinghong, Informational Feedback Effect, Adverse Selection, and the Optimal Disclosure Policy (September 1, 2011). Chicago Booth Research Paper No. 11-13. Available at SSRN: http://ssrn.com/abstract=1780462 or http://dx.doi.org/10.2139/ssrn.1780462

Contact Information

Pingyang Gao (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
Pierre Jinghong Liang
Carnegie Mellon University - Tepper School of Business ( email )
5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-3315 (Phone)
412-268-6837 (Fax)
HOME PAGE: http://www.tepper.cmu.edu/andrew/liangj
CAFR/SAIF ( email )
1954 Huashan Road
Shanghai P.R.China, 200030
China
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