- The 2025 SF Fed paper finds a causal feedback loop where higher information acquisition costs reduce transparency, lower equity values, and tighten credit access.
- Tighter financing and higher uncertainty then depress investment and productivity via misallocation, which further suppresses information acquisition and prolongs downturns in a “finance-uncertainty trap.”
- Related evidence suggests lowering information frictions (e.g., EDGAR/XBRL) reduces credit spreads and improves liquidity and borrowing, especially for opaque firms.
- Policy and firm actions that improve disclosure and data infrastructure may help break the loop, though measuring information-cost shocks and intervention trade-offs remains open.
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The working paper “Information Acquisition and the Finance-Uncertainty Trap” (SF Fed, July 2025) provides new empirical and theoretical insights into how information acquisition and credit access are interlinked in a vicious cycle. The authors document that when firms face higher costs of acquiring information—be that due to opacity, regulatory burden, or processing costs—their equity values decline, and credit access tightens. This restricts the ability of high-productivity firms to invest, causing misallocation, which drags down aggregate productivity, profits, and reduces the incentives for further information acquisition, thus feeding back into greater uncertainty and weaker finance. The model predicts that these effects significantly amplify business-cycle fluctuations.
Evidence from related studies reinforces the mechanisms found in the SF Fed paper. For instance, research on the impact of information acquisition costs (via the EDGAR/XBRL regulatory regime) shows that lowering information costs is associated with declining credit spreads, especially for firms with high informational opacity; bond liquidity improves, and non-default components of spreads fall. Another strand (e.g. “Uncertainty Shocks, Equity Financing and Business Cycle Amplifications”, J Corp Finance, 2024) models how uncertainty shocks curb equity financing, which in turn increases cost of debt and reduces investment, magnifying downturns; this is tightly aligned with the trap identified by the SF Fed authors. Studies on uncertainty traps (Fajgelbaum, Schaal & Taschereau-Dumouchel, 2014) also describe self-reinforcing regimes of high uncertainty and low investment whose recovery may be slow after large shocks.
Strategic implications for stakeholders are multi-fold. Policymakers could play a critical role in reducing information acquisition frictions via disclosure regulation, better data infrastructure, transparency mandates, or subsidies for information disclosure, since lowering such costs breaks or weakens the finance-uncertainty trap. Financial institutions and credit investors should internalize that firm opacity represents systemic risk, especially under tightening conditions. Firms themselves—including high‐productivity ones—may benefit from investing in transparency or reporting to preserve equity value and maintain credit access during periods of rising uncertainty.
However, several open questions remain. First, how do we precisely measure “information cost shocks” in real time, across firm sizes and industries? Second, what are the thresholds beyond which the finance-uncertainty trap becomes binding versus when markets self-correct? Third, what are the trade-offs or unintended consequences of regulatory shifts toward greater disclosure? Finally, how do these dynamics interact with monetary policy, especially during periods of tightening or external shocks (e.g., supply chain disruptions)?
Supporting Notes
- “Using novel measures of information acquisition, we document causal evidence of a feedback loop between firms’ credit access and information acquisition.”
- The model predicts a rise in information costs raises uncertainty, reduces equity value, and hampers credit access. Tightened constraints cause misallocation, lower productivity and profits, discouraging information acquisition.
- The authors call this a “finance-uncertainty trap” that substantially amplifies and prolongs business cycle fluctuations.
- Empirical study shows that when information acquisition costs are lowered (e.g. via EDGAR/XBRL), credit spreads decline especially for firms with high informational opacity; the non-default component of spreads drops, liquidity improves.
- In the Journal of Corporate Finance 2024 paper, uncertainty shocks reduce equity financing, increasing debt cost, reducing investment, and replicating counter-cyclical financing costs consistent with US data.
- The “Uncertainty Traps” paper models endogenous uncertainty leading to self-reinforcing cycles of high uncertainty and low activity; large shocks can lead to long lasting recessions.