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Investors’ information acquisition and the manager’s value-risk tradeoff

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  • Hao Xue

    (Duke University)

Abstract

This paper studies a model in which investors’ information acquisition and the manager’s investment choice (hence the moments of the firm’s cash flow) are jointly determined. I show that a lower information acquisition cost alters the information environment in a way that motivates the manager to prioritize reducing the variance of cash flow over improving its mean. I present conditions under which a decrease in the cost of information acquisition reduces stock valuations and investors’ welfare. The analysis highlights the importance of considering the joint determination of firm risk in studying investors’ information acquisition. The model’s predictions are relevant to the growing literature that studies technological advancements and regulatory requirements that lower the cost for investors to acquire and process information.

Suggested Citation

  • Hao Xue, 2025. "Investors’ information acquisition and the manager’s value-risk tradeoff," Review of Accounting Studies, Springer, vol. 30(1), pages 776-812, March.
    • Handle: RePEc:spr:reaccs:v:30:y:2025:i:1:d:10.1007_s11142-024-09839-3
    DOI: 10.1007/s11142-024-09839-3
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    More about this item

    Keywords

    Endogenous firm risk; Information acquisition cost; Value-risk tradeoff; Real effects; Investors’ welfare;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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