Price Rigidities and the Value of Public Information

70 Pages Posted: 6 Jan 2021 Last revised: 4 Jun 2023

See all articles by Olivia Gu

Olivia Gu

University of Illinois at Urbana-Champaign

Jin Xie

Peking University HSBC Business School

Date Written: June 19, 2021

Abstract

Firms' inflexibility in adjusting output prices to economic shocks exacerbates information asymmetry with respect to firms' profits, but public information on firms' cost structure mitigates this problem. We construct a novel form of public information from economic statistics disclosed by the government and find that such public information significantly reduces inflexible-price firms' bid-ask spreads, the probability of informed trading, and analyst forecast dispersions, but these results do not hold for flexible-price firms. Security analysts seek more cost-related information during conference calls about inflexible-price firms, but such a phenomenon is observed less frequently if a firm's input cost is more publicly available. In addition, stock markets react more strongly to earning news announced by inflexible-price firms, consistent with our intuition.

Keywords: Nominal Rigidities, Information Frictions, Public Information, Capital-Market Efficiency, Firm Transparency

JEL Classification: E12, E44, G14, G32, M40

Suggested Citation

Gu, Olivia and Xie, Jin, Price Rigidities and the Value of Public Information (June 19, 2021). Available at SSRN: https://ssrn.com/abstract=3684370 or http://dx.doi.org/10.2139/ssrn.3684370

Olivia Gu

University of Illinois at Urbana-Champaign ( email )

Champaign, IL

Jin Xie (Contact Author)

Peking University HSBC Business School ( email )

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