Government Intervention and Information Aggregation by Prices

59 Pages Posted: 15 Mar 2010 Last revised: 1 Dec 2014

Philip Bond

University of Washington - Michael G. Foster School of Business

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Date Written: December 23, 2010

Abstract

Many policy proposals call for government intervention to be based on the information in market prices of firm securities. Most of these proposals ignore the fact that market prices are endogenous to government intervention. In particular, when the government takes a corrective action based on price, the price might become less informative. We review a few channels by which this may occur, and develop a model that focuses on one such mechanism. We show that the fact that the government learns from the price when taking a corrective action might reduce the incentives of speculators to trade on their information, and hence reduce price informativeness.

Suggested Citation

Bond, Philip and Goldstein, Itay, Government Intervention and Information Aggregation by Prices (December 23, 2010). Available at SSRN: https://ssrn.com/abstract=1571431 or http://dx.doi.org/10.2139/ssrn.1571431

Philip Bond

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Itay Goldstein (Contact Author)

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Paper statistics

Downloads
169
Rank
144,425
Abstract Views
1,044