When Transparency Improves, Must Prices Reflect Fundamentals Better?

42 Pages Posted: 24 Mar 2014 Last revised: 14 Jul 2017

See all articles by Snehal Banerjee

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management

Jesse Davis

University of North Carolina (UNC) at Chapel Hill - Finance Area

Naveen Gondhi

INSEAD

Date Written: July 1, 2017

Abstract

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

Banerjee, Snehal and Davis, Jesse and Gondhi, Naveen, When Transparency Improves, Must Prices Reflect Fundamentals Better? (July 1, 2017). Available at SSRN: https://ssrn.com/abstract=2413249 or http://dx.doi.org/10.2139/ssrn.2413249

Snehal Banerjee (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Jesse Davis

University of North Carolina (UNC) at Chapel Hill - Finance Area

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Naveen Gondhi

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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