Rational Opacity

A key motivation for transparency regulations and disclosure rules is the view that corporations are more opaque than they could be. Traditional arguments attribute this tendency to agency problems between managers on one side and stakeholders and/or outsiders on the other. We propose a completely di erent argument for why corporations limit the ow of information. When secondary markets are shallow, more information can reduce the expected payo of stakeholders who need to liquidate their positions early. Even given direct and costless control over information design then, the very stakeholders of long-term investment projects have an incentive to curtail information. This holds even if stakeholders have the option to keep information releases to themselves. The existing evidence that nancial intermediaries tend to be especially opaque particularly during nancial crisis provides direct support that a fundamental trade-o exists between information and liquidity.