Does a Reduction in Processing Costs of Transaction-Level Disclosure Exacerbate Systemic Risk?

Abstract

This study examines whether a reduction in processing costs of transaction-level disclosure enables a market-wide effect in the form of increased systemic risk. Despite purported regulatory benefits of transparency, a reduction in processing costs of transaction-level disclosure can facilitate mimicking of peer firms’ investment strategies. Widespread mimicking can increase shared asset positions and common exposures to risk across firms, thereby increasing the likelihood of collective distress. Exploiting an exogenous shock enhancing the broad dissemination of transaction-level investment disclosure of U.S. insurance companies by a third-part data aggregator, I find a significant increase in asset commonality and the correlation of idiosyncratic investment risks. This reduction in industry investment diversification is associated with a significant increase in two prominent measures of systemic risk. My paper is relevant to recent calls to broadly disseminate transaction-level data as a solution to agency problems and highlights a potential unintended market-wide cost of transaction-level transparency.

Keywords: Real Effects, Processing Costs, Transaction-Level Disclosure, Systemic Risk

JEL Classification: G11, G18, G21, G22