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Information design and capital formation

Author

Listed:
  • Carvajal, Andrés
  • Rostek, Marzena
  • Sublet, Guillaume

Abstract

Could a firm benefit from not disclosing all of its private information before its stock is traded in public financial markets? So long as the investors' marginal utility function is convex and the investors differ only in their risk-sharing needs, three substantive results hold: (1) a full disclosure policy minimizes the value of the firm; (2) lifting a mandate of full disclosure does not imply that firms will necessarily choose to withhold information maximally; and (3) with many firms that strategically choose disclosure policies, all Nash equilibria display only partial disclosure. Our insight is based on the role that the firm's equity can play as a risk-sharing device: if the firm chooses to keep some information private, its stock can be used by investors to hedge against risk.

Suggested Citation

  • Carvajal, Andrés & Rostek, Marzena & Sublet, Guillaume, 2018. "Information design and capital formation," Journal of Economic Theory, Elsevier, vol. 176(C), pages 255-292.
    • Handle: RePEc:eee:jetheo:v:176:y:2018:i:c:p:255-292
    DOI: 10.1016/j.jet.2018.03.004
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Information disclosure; Information design; Value of information; Financial regulation; Crowdfunding; Initial public offerings;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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