Disclosing to Informed Traders

Professor Kevin Smith, Assistant Professor at Stanford Graduate School of Business, shows how firms manage their disclosures to exploit noise traders. The paper is available for download at https://papers.ssrn.com/sol3/papers.c.... For more, please visit our website at https://www.accountingtheory.org/ Brief Overview 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, we show that the probability of disclosure increases with market liquidity, the price impact for noise trader sales is larger than for buys, returns are negatively skewed, and the stock trades at a discount relative to expected cash flows. However, when investors are uncertain about whether the manager is informed, the opposite predictions can obtain. Moreover, contrary to common intuition, ex-ante public information can crowd in more voluntary disclosure.