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EDGAR on the internet: The welfare effects of wider information distribution in an experimental market for risky assets

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  • David Bodoff

    ()

  • Hugo Levecq

    ()

  • Hongtao Zhang

    ()

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    Abstract

    Policies such as the SEC’s Fair Disclosure Rule, and technologies such as SEC EDGAR, aim to disseminate corporate disclosures to a wider audience of investors in risky assets. In this study, we adopt an experimental approach to measure whether this wider disclosure is beneficial to these investors. Price-clearing equilibrium models based on utility maximization and non-revealing and fully-revealing prices predict that in a pure exchange economy, an arbitrary trader would prefer that no investors are informed rather than all are informed; non-revealing theory further predicts that an arbitrary trader would prefer a situation in which all traders are informed rather than half the traders are informed. These predictions can be summarized as “None > All > Halfâ€. A laboratory study was conducted to test these predictions. Where previous studies have largely focused on information dissemination and its effects on equilibrium price and insider profits, we focus instead on traders’ expected utility, as measured by their preferences for markets in which none, half, or all traders are informed. Our experimental result contradicts the prediction and indicates “Half > None > Allâ€, i.e. subjects favor a situation where a random half is informed. The implication is that in addition to testing predictions of price equilibrium, experiments should also be used to verify analytical welfare predictions of expected utility under different policy choices. Copyright Economic Science Association 2006

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    File URL: http://hdl.handle.net/10.1007/s10683-006-7054-7
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    Bibliographic Info

    Article provided by Springer in its journal Experimental Economics.

    Volume (Year): 9 (2006)
    Issue (Month): 4 (December)
    Pages: 361-381

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    Handle: RePEc:kap:expeco:v:9:y:2006:i:4:p:361-381

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    Web page: http://www.springerlink.com/link.asp?id=102888

    Related research

    Keywords: Asymmetric and private information; Financial markets; Information and market efficiency; Information and internet services;

    References

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    1. Hayne E. Leland., 1990. "Insider Trading: Should It Be Prohibited?," Research Program in Finance Working Papers RPF-195, University of California at Berkeley.
    2. Copeland, Thomas E & Friedman, Daniel, 1992. "The Market Value of Information: Some Experimental Results," The Journal of Business, University of Chicago Press, vol. 65(2), pages 241-66, April.
    3. Diamond, Douglas W, 1985. " Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-94, September.
    4. Ackert, Lucy F. & Church, Bryan K., 1998. "Information dissemination and the distribution of wealth: Evidence from experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 37(3), pages 357-371, November.
    5. Ausubel, Lawrence M, 1990. "Insider Trading in a Rational Expectations Economy," American Economic Review, American Economic Association, vol. 80(5), pages 1022-41, December.
    6. Plott, Charles R. & Sunder, Shyam., . "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers 463, California Institute of Technology, Division of the Humanities and Social Sciences.
    7. Copeland, Thomas E & Friedman, Daniel, 1991. " Partial Revelation of Information in Experimental Asset Markets," Journal of Finance, American Finance Association, vol. 46(1), pages 265-95, March.
    8. Plott, Charles R & Sunder, Shyam, 1982. "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 663-98, August.
    9. Charles R. Schnitzlein, 2002. "Price Formation and Market Quality When the Number and Presence of Insiders Is Unknown," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1077-1109.
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