The purpose of this paper is two-fold. First, I attempt a taxonomy of the extant accounting literature on disclosure: that is, a categorization of the various models of disclosure in the literature into well-integrated topics. With regard to the taxonomy, I suggest three broad categories of disclosure research in accounting. The first category, which I dub “association-based disclosure”, is work that studies the effect of exogenous disclosure on the cumulative change or disruption in investors’ individual actions, primarily through the behavior of asset equilibrium prices and trading volume. The second category, which I dub “discretionary-based disclosure”, is work that examines how managers and/or firms exercise discretion with regard to the disclosure of information about which they may have knowledge. The third category, which I dub “efficiency-based disclosure”, is work that discusses which disclosure arrangements are preferred in the absence of prior knowledge of the information, that is, preferred unconditionally. Then, in the final section of the paper, I recommend information asymmetry reduction as one potential starting point for a comprehensive theory of disclosure. That is, I recommend information asymmetry reduction as a vehicle to integrate the efficiency of disclosure choice, the incentives to disclose, and the endogeneity of the capital market process as it involves the interactions among individual and diverse investors.

In this discussion I comment on the contribution of two papers toward our understanding of how disclosure affects the cost of capital. Specifically, in the context of these papers, I comment on whether disclosure ameliorates or exacerbates the cost of capital that arises from the existence of information asymmetries in capital markets. This is a notion that should be of fundamental interest in that it provides an economic basis for evaluating the costs and benefits of accounting information.

Pre-announcement information is private information gathered in anticipation of a public disclosure. Event-period information is private information useful in conjunction with the announcement itself. Typically rational models of trade are based exclusively on one type of information. Such models are less descriptive of real market settings and misspecified empirically. Therefore, we introduce a model of rational trade with both features and discuss its implications.

The paper analyzes the use of reported accounting earnings and price as a basis for compensating a manager when he trades on private information, and share price is set rationally based on privately held information, publicly available and contractible information, and publicly available but noncontractible information. In addition, we analyze the comparative statics of the compensation on reported earnings and price with respect to changes in the economy.

In this paper we investigate a firm's decision to redact proprietary information from its material contract filings. Information redaction results when the Security and Exchange Commission (SEC) grants a firm's request to withhold information from investors in its material contract filings, presumably because the information is proprietary. We hypothesize that when firms redact information, measures of adverse selection deteriorate. That is, the redaction of proprietary information from material contracts should be associated with: a larger adverse selection component of the bid‐ask spread, reductions in market depth, and lower market turnover. In addition, we conjecture that the decision to redact depends on whether the firm plans on raising capital, the competitiveness of the firm's industry, and the performance of the firm. Overall the results of our analysis generally support our predictions. We find that when firms redact information, contemporaneous measures of the adverse selection component of the bid‐ask spread rise, and market depth and share turnover deteriorate; this suggests an increase in adverse selection. We also find firms are less likely to redact when they issue long‐term debt and are more likely to redact when they are in a competitive industry or experience losses.

We formalize the effects of an earnings disclosure on security prices under an assumption of limited liability. We derive various nonlinear relations between equity prices and earnings under a variety of capital structure assumptions and. if possible, we tie the relations attained to results from the existing empirical literature. We also characterize how debt prices respond to earnings when holders of debt have limited liability. Finally, we analyze how changes in the degree of leverage and conversion features of debt affect the relation between price and earnings.

We analyze how analysts' forecasts relate to investor beliefs and describe the implications of these relations for price and volume reactions to earnings surprises. We show that dispersion among forecasts does not fully capture investor uncertainty. We also show how the relations between market reactions and forecast properties differ under the alternative assumptions of exogenous and endogenous private information acquisition. Finally, the analysis suggests refined tests for volume reactions at the time of an announcement. Our results indicate that the model is useful for understanding and interpreting empirical work and developing empirical tests of market reactions to announcements.

This paper examines a process by which information-revealing prices are determined by considering the private incentives of a price-setting agent (whom we refer to as a specialist). The specialist has private information that may be (partially) revealed through his choice of a pricing rule. We define an equilibrium as a pricing rule and a response to that rule by a representative trader that maximizes the expected utilities of the specialist and the trader, conditional on each having rational expectations. By analyzing the existence and nature of this equilibrium, we attempt to develop further insights into the behavior of markets with incomplete information.

We extend a standard, rational expectation model of trade to incorporate the possibility of individual investors delegating their trades to an informed financial intermediary. In the presence of delegated trade, we show that a firm׳s risk premium is a function of both the firm׳s exposure to a common risk factor and idiosyncratic characteristics of the firm׳s information environment. We show that even in a large economy, priced risks can manifest in the form of both idiosyncratic firm characteristics and common risk factors; as a consequence, factor-based asset pricing tests cannot rule out that a particular risk is priced.