DP9207 Financial Disclosure and Market Transparency with Costly Information Processing
Author(s): | Marco Di Maggio, Marco Pagano |
Publication Date: | November 2012 |
Keyword(s): | financial disclosure, information processing, liquidity, market transparency, rational inattention |
JEL(s): | D83, D84, G18, G38, K22, M48 |
Programme Areas: | Financial Economics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=9207 |
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.