Information disclosure and price discovery

In this paper, I present a parsimonious, theoretical model to examine the influence of disclosure on market efficiency and on the cost of capital in the presence of endogenous information acquisition. Because disclosure “crowds out” private-information production, disclosure can either improve or harm market efficiency and the cost of capital, depending on whether investors׳ private-information production is sensitive to disclosure. This non-monotonic disclosure-cost-of-capital relation helps reconcile the existing mixed empirical evidence and has implications for the disclosure policies of firms.