IDEAS home Printed from https://ideas.repec.org/a/bla/joares/v51y2013i5p1133-1158.html
   My bibliography  Save this article

Informational Feedback, Adverse Selection, and Optimal Disclosure Policy

Author

Listed:
  • PINGYANG GAO
  • PIERRE JINGHONG LIANG

Abstract

Faceless trading in a secondary stock market not only redistributes wealth among investors but also generates information that feeds back to real decisions. Using this observation we re‐evaluate the “leveling‐the‐playing‐field” rationale for disclosure to secondary stock markets. By partially preempting traders' information advantage established from information acquisition, disclosure reduces private incentives to acquire information, resulting in two opposite effects on firm value. On one hand, this narrows the information gap between informed and uninformed traders and improves liquidity of firm shares. On the other hand, this reduces the informational feedback from the stock market to real decisions. This tradeoff determines the optimal disclosure policy. The model explains why firm value can be higher in an environment that simultaneously promotes disclosure and private information production and why growth firms are endogenously more opaque than value firms.

Suggested Citation

  • Pingyang Gao & Pierre Jinghong Liang, 2013. "Informational Feedback, Adverse Selection, and Optimal Disclosure Policy," Journal of Accounting Research, Wiley Blackwell, vol. 51(5), pages 1133-1158, December.
    • Handle: RePEc:bla:joares:v:51:y:2013:i:5:p:1133-1158
    DOI: 10.1111/1475-679X.12019
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1475-679X.12019
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1475-679X.12019?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Kanodia, Chandra, 2007. "Accounting Disclosure and Real Effects," Foundations and Trends(R) in Accounting, now publishers, vol. 1(3), pages 167-258, October.
    2. Diamond, Douglas W & Verrecchia, Robert E, 1982. "Optimal Managerial Contracts and Equilibrium Security Prices," Journal of Finance, American Finance Association, vol. 37(2), pages 275-287, May.
    3. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2013. "Trading frenzies and their impact on real investment," Journal of Financial Economics, Elsevier, vol. 109(2), pages 566-582.
    4. Justin Wolfers & Eric Zitzewitz, 2006. "Interpreting prediction market prices as probabilities," Working Paper Series 2006-11, Federal Reserve Bank of San Francisco.
    5. Mark L. Mitchell & Kenneth Lehn, 1990. "Do Bad Bidders Become Good Targets?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 3(2), pages 60-69, June.
    6. repec:bla:jfinan:v:44:y:1989:i:3:p:633-46 is not listed on IDEAS
    7. Avanidhar Subrahmanyam & Sheridan Titman, 1999. "The Going‐Public Decision and the Development of Financial Markets," Journal of Finance, American Finance Association, vol. 54(3), pages 1045-1082, June.
    8. Demski, Joel S. & Feltham, Gerald A., 1994. "Market response to financial reports," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 3-40, January.
    9. Haresh Sapra, 2002. "Do Mandatory Hedge Disclosures Discourage or Encourage Excessive Speculation?," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 933-964, June.
    10. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
    11. Chandra Kanodia & Haresh Sapra & Raghu Venugopalan, 2004. "Should Intangibles Be Measured: What Are the Economic Trade‐Offs?," Journal of Accounting Research, Wiley Blackwell, vol. 42(1), pages 89-120, March.
    12. Arya, Anil & Mittendorf, Brian, 2005. "Using disclosure to influence herd behavior and alter competition," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 231-246, December.
    13. Diamond, Douglas W, 1985. "Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-1094, September.
    14. Shyam Sunder, 1989. "Proof that in an efficient market, event studies can provide no systematic guidance for revision of accounting standards and disclosure policy for the purpose of maximizing shareholder wealth," Contemporary Accounting Research, John Wiley & Sons, vol. 5(2), pages 452-460, March.
    15. Ronald A. Dye & S. Sridhar, 2002. "Resource Allocation Effects of Price Reactions to Disclosures," Contemporary Accounting Research, John Wiley & Sons, vol. 19(3), pages 385-410, September.
    16. Kanodia, C & Lee, DH, 1998. "Investment and disclosure: The disciplinary role of periodic performance reports," Journal of Accounting Research, Wiley Blackwell, vol. 36(1), pages 33-55.
    17. Yuanzhi Luo, 2005. "Do Insiders Learn from Outsiders? Evidence from Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 60(4), pages 1951-1982, August.
    18. Qi Chen & Itay Goldstein & Wei Jiang, 2007. "Price Informativeness and Investment Sensitivity to Stock Price," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 619-650.
    19. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    20. Michael J. Fishman & Kathleen M. Hagerty, 1989. "Disclosure Decisions by Firms and the Competition for Price Efficiency," Journal of Finance, American Finance Association, vol. 44(3), pages 633-646, July.
    21. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
    22. Michael J. Fishman & Kathleen M. Hagerty, 1992. "Insider Trading and the Efficiency of Stock Prices," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 106-122, Spring.
    23. Itay Goldstein & Alexander Guembel, 2008. "Manipulation and the Allocational Role of Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(1), pages 133-164.
    24. McNichols, Maureen & Trueman, Brett, 1994. "Public disclosure, private information collection, and short-term trading," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 69-94, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Itay Goldstein, 2023. "Information in Financial Markets and Its Real Effects," Review of Finance, European Finance Association, vol. 27(1), pages 1-32.
    2. Gao, Pingyang, 2008. "Disclosure Quality, Cost of Capital, and Investors’ Welfare," MPRA Paper 9478, University Library of Munich, Germany, revised Jun 2008.
    3. Goldstein, Itay & Yang, Liyan, 2019. "Good disclosure, bad disclosure," Journal of Financial Economics, Elsevier, vol. 131(1), pages 118-138.
    4. Keming Li, 2021. "The effect of option trading," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-32, December.
    5. Tse-Chun Lin & Qi Liu & Bo Sun, 2015. "Contracting with Feedback," International Finance Discussion Papers 1143, Board of Governors of the Federal Reserve System (U.S.).
    6. Bai, Jennie & Philippon, Thomas & Savov, Alexi, 2016. "Have financial markets become more informative?," Journal of Financial Economics, Elsevier, vol. 122(3), pages 625-654.
    7. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443.
    8. Fujun Lai & Qian Wang & Qingxiang Feng, 2019. "Does Chinese Financial Market Information Promote Listed Manufacturing Firms’ Productivity?," Sustainability, MDPI, vol. 11(2), pages 1-20, January.
    9. Alex Edmans & Itay Goldstein & Wei Jiang, 2012. "The Real Effects of Financial Markets: The Impact of Prices on Takeovers," Journal of Finance, American Finance Association, vol. 67(3), pages 933-971, June.
    10. Edmans, Alex & Jayaraman, Sudarshan & Schneemeier, Jan, 2017. "The source of information in prices and investment-price sensitivity," Journal of Financial Economics, Elsevier, vol. 126(1), pages 74-96.
    11. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    12. Gary B. Gorton & Lixin Huang & Qiang Kang, 2017. "The Limitations of Stock Market Efficiency: Price Informativeness and CEO Turnover," Review of Finance, European Finance Association, vol. 21(1), pages 153-200.
    13. Markus Baldauf & Joshua Mollner, 2015. "High-Frequency Trading and Market Performance," Discussion Papers 15-017, Stanford Institute for Economic Policy Research.
    14. Chandra Kanodia & Haresh Sapra, 2016. "A Real Effects Perspective to Accounting Measurement and Disclosure: Implications and Insights for Future Research," Journal of Accounting Research, Wiley Blackwell, vol. 54(2), pages 623-676, May.
    15. Xue, Hao & Zheng, Ronghuo, 2021. "Word-of-mouth communication, noise-driven volatility, and public disclosure," Journal of Accounting and Economics, Elsevier, vol. 71(1).
    16. Ye, Mao & Zheng, Miles Y. & Zhu, Wei, 2023. "The effect of tick size on managerial learning from stock prices," Journal of Accounting and Economics, Elsevier, vol. 75(1).
    17. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    18. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2013. "Trading frenzies and their impact on real investment," Journal of Financial Economics, Elsevier, vol. 109(2), pages 566-582.
    19. Vo, Minh T., 2021. "Capital structure and cost of capital when prices affect real investments," Journal of Economics and Business, Elsevier, vol. 113(C).
    20. Cheung, William Ming Yan & Im, Hyun Joong & Selvam, Srinivasan, 2023. "Stock liquidity and investment efficiency: Evidence from the split-share structure reform in China," Emerging Markets Review, Elsevier, vol. 56(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:joares:v:51:y:2013:i:5:p:1133-1158. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0021-8456 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.