Outside Investor Access to Top Management : Market Monitoring vs. Stock Price Manipulation

This paper studies the role of voluntary disclosure in crowding out independent research about firm value. In the model, when inside firm owners make it easier for outside investors to obtain inexpensive biased information from the manager, then investors rely less on costly unbiased research. Managers are tempted to manipulate the firm stock price more, as a result, but investors are better informed because they anticipate manager manipulation. An increase in stock-price informativeness therefore has to be traded off against an increase in resources wasted on manipulation. It is shown that, surprisingly, firm owners grant investors more access to managers that manipulate more strongly. An implication is that the firm cost of capital is negatively related to manager manipulation