Abstract
ABSTRACTFirms' inflexibility in adjusting output prices to economic shocks exacerbates information asymmetry with respect to firms' profits, but public information on firms' cost structure mitigates this problem. We construct a novel form of public information from economic statistics disclosed by the government and find that such public information significantly reduces inflexible‐price firms' bid–ask spreads, the probability of informed trading, and analyst forecast dispersions, but these results do not hold for flexible‐price firms. Security analysts seek more cost‐related information during conference calls about inflexible‐price firms, but such a phenomenon is observed less frequently if a firm's input cost is more publicly observable. In addition, stock markets react more strongly to earning news announced by inflexible‐price firms, consistent with our intuition.
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