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Firms, Markets, and Information Disclosure
Friday, Jan. 7, 2022
10:00 AM - 12:00 PM (EST)
American Finance Association
Chair: Itay Goldstein,
University of Pennsylvania
Information Externalities among Listed Firms
We establish the presence of sizeable information externalities across firms listed on U.S. stock exchanges. To identify externalities, we use staggered non-marginal increases in disclosure at peer firms that are unaccompanied by changes in mandatory disclosure at focal firms. We find that a peer firm’s mandatory disclosure improves the focal firm’s trading liquidity directly by reducing adverse selection risk and indirectly by crowding in both voluntary disclosure and analyst information production at the focal firm. Positive information externalities, and the complementarities they operate through, support regulators’ use of mandatory disclosure to improve the market-wide information environment.
Disclosing to Informed Traders
We develop a model of costly voluntary disclosure in the presence of diversely-informed investors. The manager’s disclosure strategy influences trading by investors, which in turn affects the manager’s incentives to disclose. When the manager is known to be informed, there exists a unique threshold equilibrium in which only sufficiently good news is disclosed. This equilibrium exhibits two novel features. First, more public information can increase the likelihood of voluntary disclosure. Second, the firm is either over- or under-valued relative to fundamentals, depending on how investors use the information in prices. When investors are uncertain about whether the manager is informed and investors’ information is sufficiently precise, this threshold equilibrium may break down.
Climate Risk Disclosure and Institutional Investors
Employing firm disclosure theory, we develop hypotheses regarding the preferences of institutional investors with respect to firms’ climate-related disclosures. Through a survey and empirical tests, we test these hypotheses and provide systematic evidence suggesting that institutional investors value and demand climate-related disclosures, that climate-specific disclosure costs and benefits affect these disclosure demands, and that influence and selection effects explain the equilibrium relations between institutional ownership and disclosure. We establish evidence on the influence and selection effects of the climate-related disclosures by examining the French Article 173, the investor coalition Climate Action 100+, and the UK mandatory carbon disclosure regulation.
Information Disclosure and Drug Development: Evidence from Mandatory Reporting of Clinical Trials
Using the Food and Drug Administration Amendments Act of 2007 (FDAAA) that requires drug developers to disclose detailed clinical study results publicly, we examine the effect of information disclosure on drug development. We find significantly more suspensions of new drug projects after the FDAAA with a causal interpretation based on difference-in-differences analyses. Further evidence supports peer learning as a mechanism for the increased suspensions after the FDAAA. We also analyze social welfare implications of enhanced information disclosure; while the FDAAA helps improve drug quality, it leads to more suspensions of potential new drugs that could have reduced mortality and morbidity.
University of Illinois
New York University