When Disclosure Isn’t Enough: Evidence on Cursedness in Betting Markets

Abstract

The SEC recently proposed new restrictions and expanded disclosures to combat insider trading abuses. We examine the effects of analogous regulatory interventions related to ownership sales in thoroughbred horse betting, a market with numerous parallels to capital markets. Drawing on the “cursedness” literature, we predict and find that bettors underreact to the negative information contained in disclosures of an owner’s decision to offer an asset for sale, implying transparency alone is insufficient to foster efficient markets. Rather, only heavy-handed regulation, which restricts owners’ ability to exploit their private information, eliminates mispricing of the for-sale signal. Our results contribute to the regulatory debate on which interventions are most likely to promote price efficiency and shed new light on the asset- and regulation-specific factors that contribute to cursedness in markets.

Keywords: disclosure, cursedness, betting markets, ownership sales, regulatory interventions

JEL Classification: D03, D82, D83, G02, G14, G18