Financial Disclosure and Market Transparency with Costly Information Processing
Forthcoming, Review of Finance
47 Pages Posted: 1 Nov 2014 Last revised: 7 Dec 2016
Date Written: November 20, 2016
We study a model where some investors ("hedgers") are bad at information processing, while others ("speculators") have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators' trades more visible to hedgers. Hence, issuers will oppose both the disclosure of fundamentals and trading transparency. Issuers may either under- or over-provide information compared to the socially efficient level if speculators have more bargaining power than hedgers, while they never under-provide it otherwise. When hedgers have low financial literacy, forbidding their access to the market may be socially efficient.
Keywords: disclosure, transparency, financial literacy, limited attention, OTC markets
JEL Classification: D83, D84, G18, G38, K22, M48
Suggested Citation: Suggested Citation