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Markets versus Mechanisms

Author

Listed:
  • Raphael Boleslavsky
  • Christopher A Hennessy
  • David L Kelly

Abstract

We establish limitations to the usage of direct revelation mechanisms (DRMs) by corporations seeking decision-relevant information in economies with securities markets. In this environment, posting a DRM increases the informed agent’s outside option: if the agent rejects the DRM, he convinces the market he is uninformed, and he can aggressively trade with low price impact, thereby generating large (off-equilibrium) trading gains. This endogenous outside option may make using a DRM to screen uninformed agents impossible. When screening is possible, solely relying on the market for information is optimal if the increase in outside option is sufficiently large.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Raphael Boleslavsky & Christopher A Hennessy & David L Kelly, 2022. "Markets versus Mechanisms," The Review of Financial Studies, Society for Financial Studies, vol. 35(7), pages 3139-3174.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:7:p:3139-3174.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab131
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    Citations

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    Cited by:

    1. Itay Goldstein, 2023. "Information in Financial Markets and Its Real Effects," Review of Finance, European Finance Association, vol. 27(1), pages 1-32.

    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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