When Transparency Improves, Must Prices Reflect Fundamentals Better?
42 Pages Posted: 24 Mar 2014 Last revised: 14 Jul 2017
Date Written: July 1, 2017
No. In the presence of speculative opportunities, investors can learn about both asset fundamentals and the beliefs of other traders. We show that this learning exhibits complementarity: learning more along one dimension increases the value of learning about the other. As a result, regulatory changes may be counterproductive. First, increasing transparency (i.e., making fundamental information cheaper to acquire) can make prices less informative when investors respond by learning relatively more about others. Second, public disclosures can discourage private learning about fundamentals while encouraging information acquisition about others. Accordingly, disclosing more fundamental information can decrease overall informational efficiency by decreasing price informativeness.
Keywords: Transparency, price efficiency, regulation, information acquisition, difference of opinions, disclosure
JEL Classification: G14, D82, G18
Suggested Citation: Suggested Citation