Information Disclosure in Financial Markets

Posted: 3 Jan 2018

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Liyan Yang

University of Toronto - Rotman School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 2017

Abstract

Information disclosure is an essential component of regulation in financial markets. In this article, we provide a cohesive analytical framework to review certain 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 address 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 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 investors’ 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 should be considered in determining its optimal level.

Suggested Citation

Goldstein, Itay and Yang, Liyan, Information Disclosure in Financial Markets (November 2017). Annual Review of Financial Economics, Vol. 9, pp. 101-125, 2017. Available at SSRN: https://ssrn.com/abstract=3095979 or http://dx.doi.org/10.1146/annurev-financial-110716-032355

Itay Goldstein (Contact Author)

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

University of Toronto - Rotman School of Management ( email )

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

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