Public Disclosure of Forward Contracts and Revelation of Proprietary Information

35 Pages Posted: 29 Jan 2002

See all articles by John S. Hughes

John S. Hughes

University of California at Los Angeles

Jennifer L. Kao

Independent

Michael Williams

affiliation not provided to SSRN

Date Written: January 20, 2002

Abstract

Financial executives of firms engaged in forward contracting have raised concerns that mandated disclosure of those contracts would reveal proprietary information to rival firms. This paper considers the basis for those concerns in the framework of a duopoly in which one privately informed producer enters the forward market prior to production. In choosing its forward position, the firm considers the effects of that position on the forward price and second stage product market competition with its rival. Two regimes are considered: mandated disclosure and no disclosure. Under the former, the contracting firm faces a tension between exploiting its information advantage in the forward market and attempting to influence the production decision of its rival. On average, in equilibrium, the contracting firm gains a first-mover advantage, but at the cost of revealing its private information to its rival and extracting less expected gains from uninformed forward market participants. In contrast, with no disclosure, the contracting firm cannot influence rival firm beliefs, but extracts more expected gains from its private information in both the forward and product markets. On balance, the contracting firm prefers no disclosure. Moreover, parameterizations exist such that the rival also prefers that regime. These findings explain the opposition of respondents to draft proposals of Statement of Financial Standards No. 133.

Keywords: Cournot; Stackelberg; Asymmetric information; Financial disclosure; Derivatives

JEL Classification: G13, K22, L13, M41, M45

Suggested Citation

Hughes, John S. and Kao, Jennifer L. and Williams, Michael G., Public Disclosure of Forward Contracts and Revelation of Proprietary Information (January 20, 2002). Available at SSRN: https://ssrn.com/abstract=297971 or http://dx.doi.org/10.2139/ssrn.297971

John S. Hughes (Contact Author)

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-794-9553 (Phone)
310-267-2193 (Fax)

Jennifer L. Kao

Independent

Michael G. Williams

affiliation not provided to SSRN

No Address Available

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