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Word-of-mouth communication, noise-driven volatility, and public disclosure
Journal of Accounting and Economics ( IF 7.293 ) Pub Date : 2020-09-23 , DOI: 10.1016/j.jacceco.2020.101363
Hao Xue , Ronghuo Zheng

This paper examines how a firm adjusts its disclosure quality in response to technological innovations that improve investors' private information. We show that more precise private information can endogenously amplify supply shocks and, hence, increase noise-driven (or non-fundamental) price volatility. We study how the firm reacts to such changes and derive a necessary and sufficient condition under which the firm improves its disclosure quality when investors are informed with better private signals. We then apply our model to study investors' private word-of-mouth communication. Our analysis highlights a “dark side” of word-of-mouth communication and a call for better public disclosure even if private communication is assumed to be unbiased and truthful. We provide empirical predictions regarding how price volatility, market depth, and firms’ disclosure qualities would change as technological innovations, such as social media, facilitate information sharing among investors.



中文翻译:

口碑传播,噪声驱动的波动性和公开披露

本文研究了企业如何根据可改善投资者私人信息的技术创新来调整其披露质量。我们表明,更精确的私人信息可以内生地扩大供应冲击,从而增加噪声驱动的(或非基本的)价格波动。我们研究了公司如何应对这种变化,并得出了必要和充分的条件,在这种条件下,当投资者以更好的私人信号通知投资者时,公司将提高其披露质量。然后,我们将模型应用于研究投资者的私人口碑传播。我们的分析强调了口碑传播的“阴暗面”,并呼吁更好地公开披露,即使私人传播被认为是公正和真实的。我们提供有关价格波动,市场深度,

更新日期:2020-09-23
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