This study examines the effects of a government bailout on corporate disclosure when a firm is exposed to the risk of investors withdrawing their investments from the firm. The government bailout affects the behavior of investors, which, in turn, alters the disclosure behavior of the firm. We find that the firm discloses less (more) than the case without a bailout when investors have pessimistic (optimistic) beliefs about the firm. These changes in disclosure decision reduce investors’ expectations about the firm’s fundamentals. Therefore, the government bailout can increase the likelihood of the firm facing a liquidity crisis if it distorts the disclosure behavior of the firm.
Keywords: Corporate Disclosure, Government Bailout, Liquidity Crisis, Coordination Failure, Global Game
JEL codes: M40, G01, G28, D82, D83
Corporate Disclosure, Government Bailout, Liquidity Crisis, Coordination Failure, Global Game