Risk Information, Investor Learning, and Informational Feedback

47 Pages Posted: 4 Dec 2018 Last revised: 25 Jan 2022

See all articles by Kevin Smith

Kevin Smith

Stanford University Graduate School of Business

Date Written: January 24, 2022

Abstract

This paper studies how public information regarding a firm's riskiness affects investors' incentives to acquire information about the firm and the firm's ability to learn decision-useful information from its price. I find that risk information complements investor learning by informing investors of when it is most lucrative to investigate the firm, thereby reducing liquidity. Furthermore, risk information causes the firm's price to contain more information when its investment decisions have the greatest impact on its value, thereby improving real efficiency. Extensions of the model suggest that the impact of risk information on real efficiency may deteriorate when the firm's manager is excessively exposed to idiosyncratic risk, when the firm's shareholders are excessively averse to such risk, or when the disclosure concerns a ``downside risk.'' In sum, my analysis suggests that information regarding firms' expected values and their risks significantly differ in their effects on the capital market.

Keywords: Risk Disclosure, Liquidity, Investment Efficiency

JEL Classification: M41, G10, G12, G14

Suggested Citation

Smith, Kevin, Risk Information, Investor Learning, and Informational Feedback (January 24, 2022). Stanford University Graduate School of Business Research Paper No. 19-8, Available at SSRN: https://ssrn.com/abstract=3282057 or http://dx.doi.org/10.2139/ssrn.3282057

Kevin Smith (Contact Author)

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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