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Information Design in Financial Markets
|Title:||Information Design in Financial Markets|
|Date Issued:||16 Aug 2020|
|Abstract:||We study the optimal disclosure policy of a firm that wishes to maximize its|
expected stock price in the classic setting in which its stock is traded by risk-averse investors and noise
traders. We find that the optimal disclosure policy is imprecise and leads to skewed posterior beliefs. This policy
subjects short positions to tail risk, causing investors to demand a large increase in price to absorb noise-trader purchases and leading to overvaluation. Our results suggest that when firms
have flexibility in their disclosure choice, disclosure need not improve
price efficiency nor enhance liquidity.
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