Subjecting corporations to a higher standard of financial disclosure affects the welfare of public investors in several ways. By examining the interaction between a large public investor and dealers, we show that disclosure affects the equilibrium transaction price in two ways: (1) Disclosure increases the precision of all market participants' signals regarding the value of the risky asset and increases the equilibrium price; (2) Disclosure reduces the adverse-selection risk counter-party traders associate with a large size trade and reduces the equilibrium price. The net, overall effect of trade disclosure depends on the interaction of these two effects. Further, we show that in order for a rational expectations equilibrium to exist, the quality of firm-specific information resulting from disclosure has to be modest relative the perceived need for non-information trading.
W. David Zhang and Mojtaba Seyedian. "Public Disclosure and Brokerage Search." New York Economic Review. vol. 35, Fall 2004, p. 51-63
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