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.

We characterize the steady-state equilibrium in which informed traders who exhibit heuristic (i.e., representativeness, as opposed to Bayesian) and Bayesian behaviors achieve the same expected utility. Then, we show how the endogenous, steady-state proportion of heuristic traders is affected by the quality of public information and other exogenous features of our model. Finally, we discuss how the presence of heuristic traders potentially alters the link between improved public disclosure and market liquidity, the variance in the change in price, and market efficiency.

We study when it is appropriate to add a convex component such as stock options to an optimal, managerial compensation contract. We show that convexity is introduced when managers have moderate levels of relative risk aversion and decreasing absolute risk aversion. In addition, we study how convexity is affected as the distribution of outcomes becomes more skewed toward low outcomes. Here we show that while convexity increases when skewness is increased without regard to the effect on mean stock price, the opposite effect results when increases in skewness leave the mean stock price unchanged.