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Disclosure Decisions by Firms and the Competition for Price Efficiency




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    • Kellogg Graduate School of Management, Northwestern University. We would like to thank Sugato Bhattacharyya, Doug Diamond, Bill Rogerson, Chester Spatt, and seminar participants at Columbia, MIT, Minnesota, and Wisconsin for helpful comments. The second author would like to thank the Banking Research Center at Northwestern University for financial support.


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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