Advanced Search
MyIDEAS: Login

Fair Disclosure and Investor Asymmetric Awareness in Stock Markets

Contents:

Author Info

  • Liu, Zhen
Registered author(s):

Abstract

The US Security and Exchange Commission implemented Regulation Fair Disclosure in 2000, requiring that an issuer must make relevant information disclosed to any investor available to the general public in a fair manner. Focusing on firms that are affected by the regulation, we propose a model that characterizes the behavior of two types of investors\----one professional investor and many small investors\----in the regimes before and after the regulation, i.e., under selective disclosure and fair disclosure. In particular, we introduce the concept of awareness and allow investors to be aware of relevant information symmetrically or asymmetrically. We show that with symmetric awareness, fair disclosure induces both a low cost of capital and a low cost of information, therefore making the market efficient. Also, the professional investor collects an equal level of information under fair disclosure than under selective disclosure. However when small investors are not fully aware, fair disclosure still induces a low cost of capital but may induce a high cost of information. The professional investor may deliberately collect less information under fair disclosure than under selective disclosure. With asymmetric awareness, our theory produces predictions that match the empirical findings by Ahmed and Schneible Jr. (2004) and Gomes, Gorton, and Madureira (2006). They find that small and complex firms are negatively affected by the regulation. We also show that fair disclosure improves the welfare of small investors when they are extremely unaware. Such results are not compatible with the standard symmetric awareness assumption.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://mpra.ub.uni-muenchen.de/917/
File Function: original version
Download Restriction: no
File URL: http://mpra.ub.uni-muenchen.de/1969/
File Function: revised version
Download Restriction: no

Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 917.

as in new window
Length:
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:pra:mprapa:917

Contact details of provider:
Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC

Related research

Keywords: Reg FD; Regulation Fair Disclosure; Information Disclosure; Fair Disclosure; Selective Disclosure; Unawareness; Asymmetric Awareness;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  2. Francis, Jennifer & Nanda, Dhananjay & Wang, Xin, 2006. "Re-examining the effects of regulation fair disclosure using foreign listed firms to control for concurrent shocks," Journal of Accounting and Economics, Elsevier, vol. 41(3), pages 271-292, September.
  3. Malmendier, Ulrike & Shanthikumar, Devin, 2007. "Are small investors naive about incentives?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 457-489, August.
  4. Heifetz, Aviad & Meier, Martin & Schipper, Burkhard C., 2006. "Interactive unawareness," Journal of Economic Theory, Elsevier, vol. 130(1), pages 78-94, September.
  5. Salvatore Modica & J.-Marc Tallon & Aldo Rustichini, 1998. "Unawareness and bankruptcy: A general equilibrium model," Economic Theory, Springer, vol. 12(2), pages 259-292.
  6. Enrique L. Kawamura, 2002. "Competitive Equilibrium with Unawareness in Economies with Production," Working Papers 45, Universidad de San Andres, Departamento de Economia, revised Apr 2002.
  7. Afshad Irani, 2004. "The Effect of Regulation Fair Disclosure on the Relevance of Conference Calls to Financial Analysts," Review of Quantitative Finance and Accounting, Springer, vol. 22(1), pages 15-28, January.
  8. Milgrom, Paul & Weber, Robert J., 1982. "The value of information in a sealed-bid auction," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 105-114, June.
  9. Feinberg, Yossi, 2005. "Games with Incomplete Awareness," Research Papers 1894, Stanford University, Graduate School of Business.
  10. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:917

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.