Efficiency Costs Fairness: Resolving Financial Market Rumors through Public Inquiries
47 Pages Posted: 17 Aug 2013 Last revised: 9 Oct 2018
Date Written: September 27, 2018
Should regulators require firms to confirm or deny rumours publicly? In a sequential trading model, such a regulation might enhance pricing efficiency through two mechanisms: (i) an increase to the number of informed traders brought about by the public inquiry, and (ii) a shortened information advantage period. However, data from rumour-disclosure events on the Korea Exchange show that such regulations reduce fairness: informed traders earn higher profits than in the absence of the regulation due to an increase in noise trading and false alerts. Rumour disclosure alerts investors about uncertain information that creates investors' attention and leads to unintended consequences.
Keywords: Market microstructure, Rumor, Inquiry disclosure
JEL Classification: D82, G10, G14, G18
Suggested Citation: Suggested Citation