Risk Disclosure, Liquidity, and Investment Efficiency

45 Pages Posted: 4 Dec 2018 Last revised: 12 Aug 2019

See all articles by Kevin Smith

Kevin Smith

Stanford University Graduate School of Business

Date Written: June 12, 2019

Abstract

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

Smith, Kevin, Risk Disclosure, Liquidity, and Investment Efficiency (June 12, 2019). 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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