Information Disclosure, Intertemporal Risk Sharing, and Stock Prices

Abstract

Disclosure of information triggers immediate price movements, but it mitigates price movements at a later date, when the information would otherwise have become public. Consequently, disclosure shifts risk from later cohorts of investors to earlier cohorts. Hence, disclosure policy can be interpreted as a tool to control the variance of interim price movements, and to allocate risk intertemporally. This paper shows that a policy of partial disclosure (and, hence, of intertemporal risk sharing) can maximize, but also minimize, the market value of the firm. Partial disclosure of interim information and intertemporal risk sharing minimizes the ex ante market value of the firm if investors are relatively risk averse, and if the distribution of cash flow exhibits a large variation or a positive skewness. Regarding the disclosure policy, the firm, the early investors cohort, and the late investors cohort all have conflicting interests. Our model also applies to a setting where a central bank chooses the quality and frequency of the disclosure of macroeconomic information.