Disclosing to Informed Traders

52 Pages Posted: 6 Jan 2021 Last revised: 19 Mar 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: November 2, 2020

Abstract

We develop a model of costly 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. When the manager is known to be informed, there exists a unique threshold equilibrium in which only sufficiently good news is disclosed. This equilibrium exhibits two novel features. First, more public information can increase the likelihood of voluntary disclosure. Second, the firm is either over- or under-valued relative to fundamentals, depending on how investors use the information in prices. When investors are uncertain about whether the manager is informed and investors' information is sufficiently precise, this threshold equilibrium may break down.

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 (November 2, 2020). 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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