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Risk Disclosure, Liquidity, and Investment Efficiency

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  • Smith, Kevin

    (Stanford University)

Abstract

In this paper, I study the impact of a firm’s risk disclosure on investors’ desire to acquire information about the firm. I first show that risk disclosure complements private learning by enabling sophisticated investors to acquire information when it is most lucrative to do so, thereby reducing liquidity. Next, in a setting in which investors possess information regarding the profitability of the firm’s potential investments, I show that risk disclosure affects the firm’s investment efficiency by influencing the usefulness of the information that the firm derives from its share price. Finally, I demonstrate that risk disclosure can reduce the firm’s expected level of investment and therefore its expected risk.

Suggested Citation

  • Smith, Kevin, 2018. "Risk Disclosure, Liquidity, and Investment Efficiency," Research Papers 3756, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3756
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