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

40 Pages Posted: 22 Jun 2017

See all articles by Guojin Gong

Guojin Gong

Penn State University - Smeal College of Business

Hong Qu

Kennesaw State University - Michael J. Coles College of Business

Ian Tarrant

Pennsylvania State University

Date Written: June 20, 2017

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

Suggested Citation

Gong, Guojin and Qu, Hong and Tarrant, Ian M., The Effect of Disclosure and Prices on Uninformed Traders' Beliefs and Trading: An Experimental Study on Public Forecasts (June 20, 2017). Available at SSRN: https://ssrn.com/abstract=2990598 or http://dx.doi.org/10.2139/ssrn.2990598

Guojin Gong

Penn State University - Smeal College of Business ( email )

University Park, PA 16802
United States
814-863-7055 (Phone)

Hong Qu (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

HOME PAGE: http://https://works.bepress.com/hong-qu/

Ian M. Tarrant

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States

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