Financial Disclosure and Market Transparency with Costly Information Processing

Forthcoming, Review of Finance

ECGI - Finance Working Paper No. 340/2012

47 Pages Posted: 21 Oct 2012 Last revised: 22 Mar 2024

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)

Multiple version iconThere are 3 versions of this paper

Date Written: November 20, 2016

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. Hence, issuers will oppose both the disclosure of fundamentals and trading transparency. Issuers may either under- or over-provide information compared to the socially efficient level if speculators have more bargaining power than hedgers, while they never under-provide it otherwise. When hedgers have low financial literacy, forbidding their access to the market may be socially efficient.

Keywords: disclosure, transparency, complex assets

JEL Classification: D83, G18, C78

Suggested Citation

Di Maggio, Marco and Pagano, Marco, Financial Disclosure and Market Transparency with Costly Information Processing (November 20, 2016). Forthcoming, Review of Finance, ECGI - Finance Working Paper No. 340/2012, Available at SSRN: https://ssrn.com/abstract=2164839 or http://dx.doi.org/10.2139/ssrn.2164839

Marco Di Maggio (Contact Author)

Harvard Business School ( email )

Soldiers Field
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United States

HOME PAGE: http://https://www.hbs.edu/faculty/Pages/profile.aspx?facId=697248

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Marco Pagano

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

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Einaudi Institute for Economics and Finance (EIEF)

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Rome, 00187
Italy

Research Institute of Industrial Economics (IFN)

Box 55665
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Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

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