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Financial Disclosure and Market Transparency with Costly Information Processing

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  • Di Maggio, Marco
  • Pagano, Marco

Abstract

We study a model where some investors (“hedgers”) are bad at information processing, while others (“speculators”) have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators’ trades more visible to hedgers. As a consequence, asset sellers will oppose both the disclosure of fundamentals and trading transparency. This is socially inefficient if a large fraction of market participants are speculators and hedgers have low processing costs. But in these circumstances, forbidding hedgers’ access to the market may dominate mandatory disclosure.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9207.

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Date of creation: Nov 2012
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Handle: RePEc:cpr:ceprdp:9207

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Keywords: financial disclosure; information processing; liquidity; market transparency; rational inattention;

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Cited by:
  1. Marco Pagano, 2012. "Finance: Economic Lifeblood or Toxin?," CSEF Working Papers 326, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  2. Alex Edmans & Mirko Heinle & Chong Huang, 2013. "The Real Costs of Disclosure," NBER Working Papers 19420, National Bureau of Economic Research, Inc.

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