The Asset Pricing Implications of Plausible Deniability

44 Pages Posted: 4 Mar 2021

See all articles by Kerry Back

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business

Bruce Carlin

Rice University

Seyed Mohammad Kazempour

Rice University - Jesse H. Jones Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 11, 2021

Abstract

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

Back, Kerry and Carlin, Bruce and Kazempour, Seyed Mohammad, The Asset Pricing Implications of Plausible Deniability (January 11, 2021). Available at SSRN: https://ssrn.com/abstract=3764055 or http://dx.doi.org/10.2139/ssrn.3764055

Kerry Back (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Bruce Carlin

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

Seyed Mohammad Kazempour

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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