Information Disclosure, Intertemporal Risk Sharing, and Asset Prices
32 Pages Posted: 2 Sep 2010
Date Written: September 1, 2010
Disclosure of information triggers immediate price movements, but it mitigates price movements at a later date, when the information would otherwise have become public. Consequently, disclosure shifts risk from later cohorts of investors to earlier cohorts. Hence, disclosure policy can be interpreted as a tool to “control” interim asset price movements, and to allocate risk intertemporally. This paper shows that a policy of partial disclosure (and, hence, of intertemporal risk sharing) can maximize, but surprisingly also minimize, the market value of the firm. Our model also applies to a setting where a central bank chooses the quality and frequency of the disclosure of macroeconomic information, or to the precision of disclosure by (distressed) banks.
Keywords: Financial Reporting, Disclosure, Information Policy, Asset Pricing, Intertemporal Risk Sharing, General Equilibrium
JEL Classification: G14, D92, M41
Suggested Citation: Suggested Citation