Disclosing to Informed Traders

57 Pages Posted: 6 Jan 2021 Last revised: 17 Sep 2021

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 16, 2021

Abstract

We develop a model of voluntary disclosure in the presence of diversely-informed investors. The manager's disclosure strategy influences trading by investors, which in turn affects the manager's incentives to disclose. We document conditions under which there exists a unique equilibrium where the manager discloses only sufficiently favorable news. This equilibrium exhibits two novel features. First, the firm is either over- or under-valued relative to fundamentals, depending on the likelihood the manager is informed and the cost of disclosure. Second, contrary to common intuition, mandatory disclosure can increase managers’ incentives to provide voluntary disclosures.

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 16, 2021). 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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