Investors’ information acquisition and the manager’s value-risk tradeoff

Hao Xue ()
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Hao Xue: Duke University

Review of Accounting Studies, 2025, vol. 30, issue 1, No 20, 776-812

Abstract: Abstract This paper studies a model in which investors’ information acquisition and the manager’s investment choice (hence the moments of the firm’s cash flow) are jointly determined. I show that a lower information acquisition cost alters the information environment in a way that motivates the manager to prioritize reducing the variance of cash flow over improving its mean. I present conditions under which a decrease in the cost of information acquisition reduces stock valuations and investors’ welfare. The analysis highlights the importance of considering the joint determination of firm risk in studying investors’ information acquisition. The model’s predictions are relevant to the growing literature that studies technological advancements and regulatory requirements that lower the cost for investors to acquire and process information.

Keywords: Endogenous firm risk; Information acquisition cost; Value-risk tradeoff; Real effects; Investors’ welfare (search for similar items in EconPapers)
JEL-codes: D82 G14 M41 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11142-024-09839-3

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