The Economic Consequences of Selective Disclosure

47 Pages Posted: 18 Aug 2011 Last revised: 13 Nov 2014

See all articles by Bjorn Jorgensen

Bjorn Jorgensen

London School of Economics & Political Science (LSE) - Department of Accounting and Finance

Jing Li

The University of Hong Kong - Faculty of Business and Economics

Nahum D. Melumad

Columbia Business School - Accounting, Business Law & Taxation

Date Written: November 2014

Abstract

In this paper, we build on a rational expectation model to study the economic consequences of a firm's choice of disclosure audience in a market with heterogenous traders in terms of information processing abilities. Through costly expertise acquisition, some traders become sophisticated and can better process the information disclosed by the firm. In contrast to the common view that selective disclosure negatively impacts the market by allowing certain groups of investors to make profit from superior information, we show that, when the expertise acquisition is endogenous, price informativeness under selective disclosure is always higher than that in the public disclosure regime. The reason is that selective disclosure promotes the ex ante expertise acquisition among traders, and thereby improves the aggregate information quality impounded into the price. Moreover, the market liquidity and the welfare of traders may also be higher under selective disclosure, especially when the firm's information is noisy and the ability to process information matters the most to make the inference about the fundamentals.

Suggested Citation

Jorgensen, Bjorn N and Li, Jing and Melumad, Nahum D., The Economic Consequences of Selective Disclosure (November 2014). Available at SSRN: https://ssrn.com/abstract=1911653 or http://dx.doi.org/10.2139/ssrn.1911653

Bjorn N Jorgensen

London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )

Department of Accounting Room, OLD 2.17
Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www.lse.ac.uk/accounting/people/bjorn-jorgensen

Jing Li (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Nahum D. Melumad

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
611 Uris
New York, NY 10027
United States
212-854-2475 (Phone)

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