Heterogeneous Interpretations of Public Disclosure, Price Efficiency, and Keynesian Beauty Contests

Abstract

This paper examines how public information about the fundamental value of a firm affects the firm’s stock price behavior and efficiency in the presence of Keynesian beauty contests when such information is heterogeneously interpreted by investors. In an overlapping generations rational expectations model of capital markets, we show that, if transparency and clarity of a public disclosure are of comparable magnitude, clarity is of first-order importance in improving price efficiency. Moreover, marginally improving transparency can be detrimental to price efficiency if the initial level of transparency is already sufficiently high.

Keywords: Keynesian, Beauty Contest, Heterogeneous Interpretations, Transparency, Clarity, Price Efficiency, Market Efficiency

JEL Classification: G12, G14, M41