Working Paper: NBER ID: w16085
Authors: Bruce Ian Carlin; Shaun William Davies; Andrew Miles Iannaccone
Abstract: Competition for positive attention in financial markets frequently resembles a tournament, where superior relative performance and greater visibility are rewarded with convex payoffs. We present a rational expectations model in which firms compete for such positive attention and show that higher competition for this prize makes discretionary disclosure less likely. In the limit when the market is perfectly competitive, transparency is minimized. We show that this effect persists when considering general prize structures, prizes that change in size as a result of competition, endogenous prizes, prizes granted on the basis of percentile, product market competition, and alternative game theoretic formulations. The analysis implies that competition is unreliable as a driver of market transparency and should not be viewed as a panacea that assures self-regulation in financial markets.
Keywords: Competition; Financial Markets; Disclosure; Information Revelation
JEL Codes: D21; D53; G14; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased competition for positive attention (D91) | lower levels of discretionary disclosure among firms (G38) |
| more firms compete for attention (L19) | likelihood of a firm revealing private information decreases (D82) |
| observed value is below a certain threshold (C24) | firms choose to conceal private information (D82) |
| entry of new firms compresses the distribution of signals (D39) | lowers the incentive to disclose (D82) |
| perfectly competitive market (D41) | transparency is minimized (D73) |
| high status-based prizes (M52) | increased information asymmetry leads to a decline in discretionary disclosure (D82) |