Disclosing to Informed Traders

77 Pages Posted: 6 Jan 2021 Last revised: 19 Sep 2022

See all articles by Snehal Banerjee

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management

Ivan Marinovic

Graduate School of Business, Stanford University

Kevin Smith

Stanford University Graduate School of Business

Date Written: September 01, 2022

Abstract

We develop a model in which a firm's manager can voluntarily disclose to privately-informed investors. We show that, in equilibrium, the manager only discloses sufficiently favorable news. If the manager is known to be informed but disclosure is costly, the probability of disclosure increases with market liquidity and the stock trades at a discount relative to expected cash flows. However, when investors are uncertain about whether the manager is informed, disclosure can decrease with market liquidity, and the stock can trade at a premium relative to expected cash flows. Moreover, contrary to common intuition, ex-ante public information can crowd in more voluntary disclosure.

Keywords: Voluntary Disclosure, Trading, Price Efficiency, Private Information

JEL Classification: D72, D82, D83, G20

Suggested Citation

Banerjee, Snehal and Marinovic, Ivan and Smith, Kevin, Disclosing to Informed Traders (September 01, 2022). Available at SSRN: https://ssrn.com/abstract=3723747 or http://dx.doi.org/10.2139/ssrn.3723747

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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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