Speculation with Information Disclosure
96 Pages Posted: 6 Oct 2016 Last revised: 11 May 2020
Date Written: May 9, 2020
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: Suggested Citation