The Asset Pricing Implications of Plausible Deniability
44 Pages Posted: 4 Mar 2021
Date Written: January 11, 2021
We derive the effect of plausible deniability on asset risk premia in a dynamic setting with correlated firm values, systematic risk, and risk-averse investors. Firms optimally exercise American disclosure options, which are more valuable due to the possibility that other correlated firms may disclose high values, lifting investors' perceptions of the values of nondisclosing firms. Risk premia rise (and average prices fall) prior to disclosures, because investors make inferences about aggregate risks from failures to disclose, resulting in higher state prices for bad states.
Keywords: disclosures, announcement returns
JEL Classification: G00, D82
Suggested Citation: Suggested Citation