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Financial Disclosure and Market Transparency with Costly Information Processing

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  • Marco Di Maggio

    (Columbia Business School)

  • Marco Pagano

    (University of Naples "Federico II", CSEF, EIEF and CEPR)

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 fi nancial 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, issuers 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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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1212.

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Length: 51 pages
Date of creation: 2012
Date of revision: May 2014
Handle: RePEc:eie:wpaper:1212

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Cited by:
  1. Edmans, Alex & Heinle, Mirko & Huang, Chong, 2013. "The Real Costs of Disclosure," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9637, C.E.P.R. Discussion Papers.
  2. Marco Pagano, 2013. "Finance - Economic Lifeblood or Toxin?," EIEF Working Papers Series, Einaudi Institute for Economics and Finance (EIEF) 1309, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2013.

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