Disclosures and asset returns

Public information in financial markets often arrives through the disclosures of interested parties who have a material interest in the reactions of the market to the new information. When the strategic interaction between the sender and the receiver is formalized as a disclosure game with verifiable reports, market prices observed in equilibrium can be given a simple characterization that relies only on the face value of the announcement. Also, this characterisation predicts that the return variance following a bad outcome is higher than it would have been if the outcome were good. When investors are risk averse, this leads to negative serial correlation of asset returns.

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