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Disclosing to Informed Traders

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  • SNEHAL BANERJEE
  • IVÁN MARINOVIC
  • KEVIN SMITH

Abstract

We develop a model in which a firm's manager can voluntarily disclose to privately informed investors. 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, public information can crowd in more voluntary disclosure.

Suggested Citation

  • Snehal Banerjee & Iván Marinovic & Kevin Smith, 2024. "Disclosing to Informed Traders," Journal of Finance, American Finance Association, vol. 79(2), pages 1513-1578, April.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:2:p:1513-1578
    DOI: 10.1111/jofi.13296
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