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Financial Disclosure and Market Transparency with Costly Information Processing

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Author Info

  • Marco Di Maggio

    (MIT)

  • 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 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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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: 38 pages
Date of creation: 2012
Date of revision: Oct 2012
Handle: RePEc:eie:wpaper:1212

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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.

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