Voluntary Disclosure and Informed Trading

53 Pages Posted: 10 Jan 2017 Last revised: 2 Mar 2020

Multiple version iconThere are 2 versions of this paper

Date Written: February 29, 2020


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 (February 29, 2020). Available at SSRN: https://ssrn.com/abstract=2895725 or http://dx.doi.org/10.2139/ssrn.2895725

Evgeny Petrov (Contact Author)

HKUST ( email )

Clear Water Bay
Hong Kong

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