Speculation with Information Disclosure

96 Pages Posted: 6 Oct 2016 Last revised: 11 May 2020

See all articles by Paolo Pasquariello

Paolo Pasquariello

University of Michigan, Stephen M. Ross School of Business

Yifei Wang

University of Michigan, Department of Finance

Date Written: May 9, 2020

Abstract

Sophisticated financial market participants frequently choose to disclose private information to the public—a phenomenon inconsistent with most theories of speculative trading. In this paper, we propose and test a model to bridge this gap. We show that when a speculator cares about both the short-term value of her portfolio and her long-term profit, information disclosure is optimal: Public disclosure in the form of a mixture of fundamental information and the speculator’s position induces competitive dealership to revise prices in the direction of the speculator’s position. Using mutual fund disclosure through newspaper articles, we find that when fund managers have stronger estimated short-term incentives, the frequency of strategic non-anonymous disclosures about stocks in their portfolios increases and those stocks’ liquidity improves, consistent with our model.

Keywords: Liquidity, Market Depth, Trading, Disclosure, Private Information, Mutual Funds

JEL Classification: D82, G14, G23

Suggested Citation

Pasquariello, Paolo and Wang, Yifei, Speculation with Information Disclosure (May 9, 2020). Available at SSRN: https://ssrn.com/abstract=2847321 or http://dx.doi.org/10.2139/ssrn.2847321

Paolo Pasquariello (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

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HOME PAGE: http://webuser.bus.umich.edu/ppasquar/

Yifei Wang

University of Michigan, Department of Finance ( email )

Ann Arbor, MI
United States

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