Voluntary Disclosure and Informed Trading

I study the impact of informed trading on voluntary corporate disclosure in the presence of two factors: the cost of disclosure and the value of a manager's informed‐ness. In the absence of both factors, informed trading has no impact on disclosure even when traders are not certain whether the manager has information. When disclosure is costly, informed trading serves as a free substitute for the disclosure of favorable information, and reduces disclosure. Surprisingly, when the manager's informedness is valuable for the firm, informed trading can also increase disclosure. Traders can discover unfavorable information about the firm, so a manager with such information has less incentive to pool with uninformed managers and discloses to show that he is informed. I also demonstrate that informed trading can have either a positive or a negative effect on firm value by crowding in or crowding out information production in the firm. These results hold for general information structures and are robust if traders can choose how much information to acquire