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Information Disclosure in Financial Markets

Annual Review of Financial Economics, 2017, 9, 101–125

Rotman School of Management Working Paper No. 2927013

38 Pages Posted: 4 Mar 2017 Last revised: 21 Nov 2017

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: March 3, 2017

Abstract

Information disclosure is an essential component of regulation in financial markets. In this article, we provide a cohesive analytical framework to review a few key channels through which disclosure in financial markets affects market quality, information production, efficiency of real investment decisions, and traders' welfare. We use our framework to cover four main aspects. First, we demonstrate the conventional wisdom that disclosure improves market quality in an economy with exogenous information. Second, we illustrate that disclosure can crowd out the production of private information, and that its overall market-quality implications are more subtle and depend on the specification of information-acquisition technology. Third, we review how disclosure affects the efficiency of real investment decisions when financial markets are not just a side show, as real decision makers can learn information from them to guide their decisions. Last, we discuss how disclosure in financial markets affects investor welfare through changing trading opportunities and through beauty-contest motives. Overall, our review suggests that information disclosure is an important factor for understanding the functioning of financial markets and that there are several trade-offs that need to be considered in determining its optimal level.

Keywords: disclosure, market quality, crowding-out effect, learning from prices, real efficiency, welfare

JEL Classification: G14, D83

Suggested Citation

Goldstein, Itay and Yang, Liyan, Information Disclosure in Financial Markets (March 3, 2017). Annual Review of Financial Economics, 2017, 9, 101–125; Rotman School of Management Working Paper No. 2927013. Available at SSRN: https://ssrn.com/abstract=2927013

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Liyan Yang (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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