Discussion paper

DP9207 Financial Disclosure and Market Transparency with Costly Information Processing

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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Citation

Pagano, M and M Di Maggio (2012), ‘DP9207 Financial Disclosure and Market Transparency with Costly Information Processing‘, CEPR Discussion Paper No. 9207. CEPR Press, Paris & London. https://cepr.org/publications/dp9207