Voluntary Disclosure and Informed Trading

62 Pages Posted: 10 Jan 2017 Last revised: 14 Jul 2017

Evgeny Petrov

Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute, Students; Ecole Polytechnique Fédérale de Lausanne

Date Written: January 8, 2017

Abstract

I study the impact of informed trading on voluntary corporate disclosure in the presence of two frictions: cost of disclosure and value of manager's informedness. In the absence of both frictions, informed trading has no impact on disclosure even when traders are not certain whether the manager has information. If disclosure is costly, then informed trading reduces disclosure. Since traders can discover favorable information about the firm, additional disclosure of the information is not necessary. If manager's informedness is valuable for the firm, then informed trading increases disclosure. Since traders can discover unfavorable information about the firm, the manager with such information has less incentives to pool with uninformed managers and discloses to show that he is informed. I also show that informed trading can have both a positive and a negative real effect on the firm value by crowding in or crowding out information production in the firm. These results hold for general information structures and are robust if traders can choose how much information to acquire.

Keywords: voluntary disclosure, informed trading, information acquisition, real effects

JEL Classification: G30, M41

Suggested Citation

Petrov, Evgeny, Voluntary Disclosure and Informed Trading (January 8, 2017). 2017 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=2895725

Evgeny Petrov (Contact Author)

Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute, Students ( email )

Switzerland

Ecole Polytechnique Fédérale de Lausanne ( email )

Station 5
Odyssea 1.04
1015 Lausanne, CH-1015
Switzerland

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