Information Acquisition in the Era of Fair Disclosure: An Application of Asymmetric Awareness

As the cost of financial information dissemination continues to decline, investors, firms, and regulators are gradually adopting the principle of fair disclosure, which requires no preferential public disclosure. We use a simple model to examine the impact of this change on information acquisition with two alternative assumptions: (1) Investors have symmetric awareness about the underlying uncertainties, or (2) this awareness is asymmetric among them. Under the first assumption, the change reduces information asymmetry among investors and induces acquisition of high-quality information. Under the second assumption, however, the reduction of information asymmetry may be limited, and information acquisition is either reduced or less efficient. Specifically, investors with high awareness may either acquire high-quality information at a higher cost or not acquire it; investors with low awareness only acquire low-quality information. The loss in overall information quality is greater when awareness asymmetry is moderate than when it is high or low; this causes information asymmetry between the insiders and outside investors as a whole. These results offer explanations for intriguing empirical findings regarding the effect of a recent accounting regulation (Regulation Fair Disclosure).