Heterogeneous Interpretations of Public Disclosure and Price Efficiency

Abstract

This paper examines how public disclosure affects stock price efficiency when investors interpret the information heterogeneously. We therefore distinguish disclosure accuracy (how precisely the information reflects the fundamental) from its clarity (the degree of consensus among investors). In a noisy rational expectations equilibrium, learning from prices and higher-order beliefs cause the market-clearing price to rely excessively on investors' collective knowledge about the fundamental. As a result, in both long-horizon and short-horizon economies, while greater clarity generally enhances price efficiency, greater accuracy may paradoxically reduce it. The Keynesian beauty contest incentive further reinforces the asymmetric roles of clarity and accuracy in the short-horizon economy through the publicity of interpreted disclosure, i.e., the extent to which private interpretations are correlated with each other. The level of accuracy that maximizes price efficiency increases with clarity, rendering clarity pivotal in determining the highest attainable level of price efficiency. 

Keywords: heterogeneous interpretations, accuracy, clarity, price efficiency, Keynesian beauty contest

JEL Classification: D82, G12, G14, M41