Disclosure and Efficiency in Noise-Driven Markets

Disclosure can negatively affect stock market efficiency and real investment performance in markets populated with uninformed noise traders whose trading is affected by disclosure. We formalize this idea by analyzing a model where disclosure attracts noise traders and where firms infer information from stock prices to guide real investment decisions. The model predicts that disclosure can reduce the amount of information learned by firms from stock price, which in turn harms the investment efficiency. We find strong support for these predictions regarding informational and allocative efficiency using accounting and financial data from the Chinese market.