Word of Mouth, Noise-Driven Volatility, and Public Disclosure

54 Pages Posted: 27 Dec 2018 Last revised: 8 Feb 2019

See all articles by Hao Xue

Hao Xue

Duke University - Fuqua School of Business

Ronghuo Zheng

University of Texas at Austin - McCombs School of Business

Date Written: October 9, 2018

Abstract

This paper examines how a firm's information environment is affected by technological innovations that enhance investors' private information. We show that refining investors' private information imposes an endogenous cost of amplifying supply shocks and increasing price volatility. We also examine how the firm reacts to such changes. We derive a necessary and sufficient condition under which the firm improves its disclosure quality when its investors are informed with better private signals. The analysis indicates a "dark side" of investors' word-of-mouth communications even when the communications are assumed to be unbiased and truthful. We generate empirical predictions regarding how market depth, volatility, and firms' disclosure qualities would change as technological innovations, such as social media, facilitate investors' private communications.

Keywords: Public Disclosure, Private Word of Mouth, Price Volatility

JEL Classification: D82, G14, M41

Suggested Citation

Xue, Hao and Zheng, Ronghuo, Word of Mouth, Noise-Driven Volatility, and Public Disclosure (October 9, 2018). Available at SSRN: https://ssrn.com/abstract=3298151 or http://dx.doi.org/10.2139/ssrn.3298151

Hao Xue (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Ronghuo Zheng

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

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