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Disclosure Decisions by Firms and the Competition for Price Efficiency

Michael J. Fishman and Kathleen M. Hagerty
The Journal of Finance
Vol. 44, No. 3, Papers and Proceedings of the Forty-Eighth Annual Meeting of the American Finance Association, New York, New York, December 28-30, 1988 (Jul., 1989), pp. 633-646
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328774
Stable URL: http://www.jstor.org/stable/2328774
Page Count: 14
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Disclosure Decisions by Firms and the Competition for Price Efficiency
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Abstract

This paper develops a model of the relationship between investment decisions by firms and the efficiency of the market prices of their securities. It is shown that more efficient security prices can lead to more efficient investment decisions. This provides firms with the incentive to increase price efficiency by voluntarily disclosing information about the firm. Disclosure decisions are studied. It is shown that firms may expend more resources on disclosure than is socially optimal. This is in contrast to the concern implicit in mandatory disclosure rules that firms will expend too few resources on disclosure.

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