Discussion Paper Details

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Title: Financial Disclosure and Market Transparency with Costly Information Processing

Author(s): Marco Di Maggio and Marco Pagano

Publication Date: November 2012

Keyword(s): financial disclosure, information processing, liquidity, market transparency and rational inattention

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Di Maggio, M and Pagano, M. 2012. 'Financial Disclosure and Market Transparency with Costly Information Processing'. London, Centre for Economic Policy Research.