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Investor Sophistication and Voluntary Disclosures

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  • Ronald A. Dye

    (Northwestern University)

Abstract

This paper studies voluntary disclosures in a model in which investors probabilistically become informed about whether a firm has received information. The firm's value is established via a first price, sealed bid, common value auction. The paper demonstrates that the threshold level determining whether the firm withholds or discloses information uniformly declines in the probability investors are informed. The paper also shows that, notwithstanding the risk-neutrality of investors, the expected selling price of the firm strictly decreases (increases) in the probability individual investors are informed when that probability is small (large). These results follow from “winner's curse” effects.

Suggested Citation

  • Ronald A. Dye, 1998. "Investor Sophistication and Voluntary Disclosures," Review of Accounting Studies, Springer, vol. 3(3), pages 261-287, September.
    • Handle: RePEc:spr:reaccs:v:3:y:1998:i:3:d:10.1023_a:1009627506893
    DOI: 10.1023/A:1009627506893
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    References listed on IDEAS

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    1. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-483, December.
    2. 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.
    3. Hendricks, Kenneth & Porter, Robert H, 1988. "An Empirical Study of an Auction with Asymmetric Information," American Economic Review, American Economic Association, vol. 78(5), pages 865-883, December.
    4. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
    5. Riley, John G, 1989. "Expected Revenue from Open and Sealed Bid Auctions," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 41-50, Summer.
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    Cited by:

    1. Stephen P. Baginski & Kenneth C. Rakow, 2012. "Management earnings forecast disclosure policy and the cost of equity capital," Review of Accounting Studies, Springer, vol. 17(2), pages 279-321, June.
    2. Ye Cai & Dan S. Dhaliwal & Yongtae Kim & Carrie Pan, 2014. "Board interlocks and the diffusion of disclosure policy," Review of Accounting Studies, Springer, vol. 19(3), pages 1086-1119, September.

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