Financial Disclosure and Market Transparency with Costly Information Processing

40 Pages Posted: 1 Feb 2013

See all articles by Marco Di Maggio

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Marco Pagano

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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Date Written: November 2012

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 Classification: D83, D84, G18, G38, K22, M48

Suggested Citation

Di Maggio, Marco and Pagano, Marco, Financial Disclosure and Market Transparency with Costly Information Processing (November 2012). CEPR Discussion Paper No. DP9207, Available at SSRN: https://ssrn.com/abstract=2210156

Marco Di Maggio (Contact Author)

Harvard Business School ( email )

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National Bureau of Economic Research (NBER) ( email )

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Marco Pagano

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

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Research Institute of Industrial Economics (IFN)

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