Asymmetric Disclosure, Noise Trade, and Firm Valuation

73 Pages Posted: 21 Oct 2020 Last revised: 3 Jan 2023

See all articles by Davide Cianciaruso

Davide Cianciaruso

HEC Paris - Accounting and Management Control Department

Ivan Marinovic

Graduate School of Business, Stanford University

Kevin Smith

Stanford University Graduate School of Business

Date Written: November 28, 2022

Abstract

We study the impact of asymmetric (i.e., conservative or aggressive) disclosure on a firm's price in the classic setting in which its stock is traded by risk-averse investors and noise or liquidity traders. We show that asymmetric accounting policies alter the relative risk faced by investors when they short vs. long, which causes market liquidity to differ for positive vs. negative demand shocks. As a result, accounting conservatism raises firms' valuations and lowers their expected returns. We further demonstrate that the relationship between accounting informativeness and expected returns depends upon the skewness of investors' prior beliefs. Finally, we find that a firm that can commit to an accounting policy can tailor this policy to benefit from noise trade and foster overvaluation.

Keywords: Short-selling, Noise Trade, Disclosure, Bayesian Persuasion, Downside Risk, Trading

JEL Classification: D72, D82, D83, G20

Suggested Citation

Cianciaruso, Davide and Marinovic, Ivan and Smith, Kevin, Asymmetric Disclosure, Noise Trade, and Firm Valuation (November 28, 2022). HEC Paris Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3686089 or http://dx.doi.org/10.2139/ssrn.3686089

Davide Cianciaruso

HEC Paris - Accounting and Management Control Department ( email )

Jouy-en-Josas
France

Ivan Marinovic

Graduate School of Business, Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Kevin Smith (Contact Author)

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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