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Financial Disclosure and Market Transparency with Costly Information Processing

  • Marco Di Maggio

    (Columbia Business School)

  • Marco Pagano

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

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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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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