Public disclosure with information sharing in financial market

Abstract

We analyze a rational expectations equilibrium model that explores how information sharing among investors affects price volatility and firms’ disclosure quality. We derive closed-form expressions for the stock price and optimal disclosure quality as a function of network connectedness. We show that when investors are less risk-averse, price volatility will increase as information sharing among investors becomes more active, while managers will reduce the disclosure quality. When investors are more risk-averse, price volatility and disclosure quality both have a non-monotonous relationship with network connectedness. Our analysis highlights how technology, media, and capital market changes affect firms’ disclosure policies.