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Rational Transparency Choice in Financial Market Equilibrium¤

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  • Muendler, Marc-Andreas

Abstract

Add a stage of signal acquisition to a canonical model of portfolio choice.Under fully revealing asset price, investors' information demand reflects their choice of transparency. In reducing uncertainty, financial transparency raises expected asset price and thus benefits holders of the risky asset. At a natural transparency limit, however, investors pay to inhibit further disclosure in order to forestall the erosion of the asset's expected excess return. The natural transparency limit varies with the portfolio position. There is a dominant investor with a risky asset endowment modestly above market average who single-handedly determines transparency in equilibrium. The dominant investor strictly improves welfare for investors with similar endowments but strictly reduces welfare for others when acquiring signals beyond their natural transparency limits. The welfare consequences of financial transparency are thus intricately linked to the wealth distribution.

Suggested Citation

  • Muendler, Marc-Andreas, 2005. "Rational Transparency Choice in Financial Market Equilibrium¤," University of California at San Diego, Economics Working Paper Series qt73h8z1hd, Department of Economics, UC San Diego.
  • Handle: RePEc:cdl:ucsdec:qt73h8z1hd
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    References listed on IDEAS

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    1. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," American Economic Review, American Economic Association, vol. 94(2), pages 91-98, May.
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    5. Muendler, Marc-Andreas, 2005. "The Action Value of Information and the Natural Transparency Limit¤," University of California at San Diego, Economics Working Paper Series qt6qb079x5, Department of Economics, UC San Diego.
    6. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    7. Diamond, Douglas W, 1985. " Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-1094, September.
    8. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
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