Disclosure, Learning, and Coordination

Abstract

We analyze how public disclosure of informed investors' trades results in manipulation, which in turn affects coordination and competition in a duopolistic setting. We show that disclosure always increases market efficiency but its effect on informed investors' profit is ambiguous. When informed investors have very imprecise information, disclosure makes them coordinate their trades, so their expected profits are higher. Moreover, an informed investor with very imprecise information would prefer competition in the presence of disclosure as he learns more from the other informed investor than the market maker and make more profits than he would obtain in a monopolistic market.

JEL Classification: G12, G14, G18, G19