Working Paper: CEPR ID: DP9207
Authors: Marco Di Maggio; Marco Pagano
Abstract: We study a model where some investors (?hedgers?) are bad at information processing, while others (?speculators?) have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators? trades more visible to hedgers. As a consequence, asset sellers will oppose both the disclosure of fundamentals and trading transparency. This is socially inefficient if a large fraction of market participants are speculators and hedgers have low processing costs. But in these circumstances, forbidding hedgers? access to the market may dominate mandatory disclosure.
Keywords: financial disclosure; information processing; liquidity; market transparency; rational inattention
JEL Codes: D83; D84; G18; G38; K22; M48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial disclosure (G39) | Adverse selection (D82) |
| Financial disclosure (G39) | Hedgers' behavior (D81) |
| Hedgers' behavior (D81) | Price willingness (D41) |
| Market transparency (G14) | Adverse selection (D82) |
| Market transparency (G14) | Hedgers' awareness (D84) |
| Hedgers' awareness (D84) | Adverse selection (D82) |
| Sellers' information withholding (L85) | Adverse selection (D82) |