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Fair Disclosure and Investor Asymmetric Awareness in Stock Markets


  • Liu, Zhen


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.

Suggested Citation

  • Liu, Zhen, 2006. "Fair Disclosure and Investor Asymmetric Awareness in Stock Markets," MPRA Paper 917, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:917

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    References listed on IDEAS

    1. 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.
    2. Malmendier, Ulrike & Shanthikumar, Devin, 2007. "Are small investors naive about incentives?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 457-489, August.
    3. Salvatore Modica & J.-Marc Tallon & Aldo Rustichini, 1998. "Unawareness and bankruptcy: A general equilibrium model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(2), pages 259-292.
    4. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 505-540.
    5. 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.
    6. 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.
    7. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    8. Heifetz, Aviad & Meier, Martin & Schipper, Burkhard C., 2006. "Interactive unawareness," Journal of Economic Theory, Elsevier, vol. 130(1), pages 78-94, September.
    9. Kawamura, Enrique, 2005. "Competitive equilibrium with unawareness in economies with production," Journal of Economic Theory, Elsevier, vol. 121(2), pages 167-191, April.
    10. Feinberg, Yossi, 2005. "Games with Incomplete Awareness," Research Papers 1894, Stanford University, Graduate School of Business.
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    More about this item


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

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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