Private Information Discovery, the Value-Risk Tradeoff, and Public Disclosure

Technological advancements have lowered the cost for investors to acquire information. We study implications of a lower information acquisition cost in a model where investors' private information production and the manager's behind-the-scenes project management activities are jointly determined. Consistent with empirical evidence, we show that a lower information acquisition cost motivates more investors to acquire information, improves price informativeness, and increases market depth. However, these "benefits" are observed in part because the manager is pressured to shift the attention away from improving the expected value and toward reducing firm risk. The change can reduce both the expected firm value and investors' payoff from trading the firm's share. The result cautions against interpreting evidence of higher liquidity and price informativeness as evidence that technologies that facilitate information acquisition are beneficial. Finally, we show that public disclosure is an efficient way to mitigate the inefficiencies investors face in acquiring private information and, hence, rebalances the manager's value-risk tradeoff