Risk Disclosure, Liquidity, and Investment Efficiency
45 Pages Posted: 4 Dec 2018 Last revised: 12 Aug 2019
Date Written: June 12, 2019
In this paper, I study the impact of disclosure that provides information regarding a firm's risk on liquidity and investment efficiency. I first show that such disclosure complements private learning by enabling investors to acquire more information when it is more lucrative to do so, thereby reducing liquidity. Then, in a setting in which the firm learns decision-relevant information from its stock price, I show that risk disclosure can enhance the firm's investment efficiency by influencing the usefulness of the information contained in this price. Finally, I find that risk disclosure reduces expected firm investment and expected firm risk.
Keywords: Risk Disclosure, Liquidity, Investment Efficiency
JEL Classification: M41, G10, G12, G14
Suggested Citation: Suggested Citation