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Security Price Informativeness with Delegated Traders

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER)

Ping He

Tsinghua University, SEM

Lixin Huang

Georgia State University

February 3, 2009

We study the "efficient markets" paradigm in the context of agency relations: principal-investors want to monitor and compensate their agent-traders using market security prices in "mark-to-market" contracts. The view of each principal is that market prices aggregate the information from other market participants so they can be used to monitor agent-traders. If the market is dominated by such delegated traders, then these traders can attempt to manipulate the market price by shirking jointly and buying or selling in the same direction. In this way, traders provide market "proof" that they have worked hard and deserve high compensation. We show that markets dominated by delegated traders are less efficient than other markets. The extent of "market efficiency," indexed by the delegated traders' propensity of joint shirking, is endogenized.

Number of Pages in PDF File: 45

Keywords: agency problem, mark to market, market efficiency

JEL Classification: G12, G14, G20

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Date posted: February 3, 2006 ; Last revised: February 3, 2009

Suggested Citation

Gorton, Gary B. and He, Ping and Huang, Lixin, Security Price Informativeness with Delegated Traders (February 3, 2009). Available at SSRN: http://ssrn.com/abstract=879786 or http://dx.doi.org/10.2139/ssrn.879786

Contact Information

Gary B. Gorton (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203 432-8931 (Fax)
HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Ping He
Tsinghua University, SEM ( email )
Beijing, 100084
8610-62795754 (Phone)
8610-62784554 (Fax)
HOME PAGE: http://www.heping.ac
Lixin Huang
Georgia State University ( email )
35 Broad Street
Atlanta, GA 30303-3083
United States
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