The Effect of Disclosure and Prices on Uninformed Traders' Beliefs and Trading: An Experimental Study on Public Forecasts

Abstract

We study how uniformed traders (defined as strategic traders not endowed with private information) use public disclosure and prices to form beliefs and trade. We manipulate the availability of public forecasts (e.g. earnings forecasts) of forthcoming public signals (e.g., earnings announcements). Forecasts preempt the majority of information in earnings and become redundant after earnings announcements. This unique information structure allows us to detect two interactive effects of public disclosure and prices on uninformed traders’ beliefs. First, disclosure can reinforce learning from prices. We find this effect dominates when earnings informativeness is high. As forecasts lead to more informative prices, uninformed traders have more accurate beliefs after earnings announcements because they glean more information from prices. Second, disclosure can hinder learning from prices. We find this effect dominates when earnings informativeness is low. Uninformed traders overuse information in public disclosure and underuse information in prices. Such misweighting of information is more severe when forecasts are available.

Keywords: Public Forecast, Information Aggregation, Information Asymmetry, Price Efficiency, Moderated Confidence, Investor Welfare, Experimental Market

JEL Classification: C92, D82, G14