Voluntary Disclosure, Price Informativeness, and Efficient Investment

Abstract

This paper studies efficiency implications of voluntary disclosure, where market prices are a source of information for corporate investment-making. To improve her investment decision, a manager discloses her private information if it crowds-in informed trading and helps her to learn more information from the market. However, such disclosing behavior generates an unintended consequence: It reduces informed trading and harms investment-making whenever there is no disclosure. The efficiency loss after nondisclosure may dominate, implying that voluntary disclosure can be a source of real inefficiency through distorting market feedback. The model provides important empirical and policy implications regarding feedback-intended voluntary disclosure.

Keywords: Voluntary Disclosure, Price Informativeness, Investment Efficiency, No News Is Bad News

JEL Classification: D82, G14, G31, M41