Disclosure Drifts in Investor Networks
University of Texas at Austin - Red McCombs School of Business
University of Chicago - Booth School of Business
University of Michigan, Stephen M. Ross School of Business
May 20, 2011
This study develops a model of information diffusion in a setting where investors are linked in a social network. We develop a model in which a firm's disclosure initially reaches only a subset of the investor base. Examples include investor relations conferences and settings where finite attention and cognitive skills limit the set of investors who monitor the firm's disclosures. While investors can learn from prices in our model, we focus on how the initially uninformed investors receive the information through the investor network. The price and trading reactions to disclosure depend on both the structure of the network and which investors initially receive the information. In particular, investors who are most connected play a key role in driving the price response to disclosure, and the ability of the disclosure transmission mechanism to reach these investors becomes crucial. Our model offers a simple way to consolidate and extend the findings of several recent empirical papers that highlight the importance of the disclosure transmission mechanism (i.e., broadcast disclosures via press and electronic channels, or targeted disclosures via investor conferences and investor relations), and is a departure from the traditional accounting disclosure models that focus on the disclosed information itself and are largely silent on the properties of the underlying transmission mechanism.
Number of Pages in PDF File: 44
Keywords: disclosure, networks, investor relations, bid-ask spreads
JEL Classification: D85, G12, G14, M41working papers series
Date posted: May 25, 2011 ; Last revised: June 5, 2011
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