Risk Disclosure, Liquidity, and Investment Efficiency
52 Pages Posted: 4 Dec 2018 Last revised: 16 Jan 2019
Date Written: November 9, 2018
In this paper, I study the impact of a firm's risk disclosure on investors' desire to acquire information about the firm. I first show that risk disclosure complements private learning by enabling sophisticated investors to acquire information when it is most lucrative to do so, thereby reducing liquidity. Next, in a setting in which investors possess information regarding the profitability of the firm's potential investments, I show that risk disclosure affects the firm's investment efficiency by influencing the usefulness of the information that the firm derives from its share price. Finally, I demonstrate that risk disclosure can reduce the firm's expected level of investment and therefore its expected risk.
Keywords: Risk Disclosure, Liquidity, Investment Efficiency
JEL Classification: M41, G10, G12, G14
Suggested Citation: Suggested Citation