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Financial Disclosure and Market Transparency with Costly Information Processing

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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 Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 323.

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Date of creation: 23 Oct 2012
Date of revision: 23 Jul 2016
Publication status: Forthcoming in Review of Finance
Handle: RePEc:sef:csefwp:323
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