Security Price Informativeness with Delegated Traders

Gary Gorton, Ping He and Lixin Huang ()

American Economic Journal: Microeconomics, 2010, vol. 2, issue 4, 137-70

Abstract: Trade in securities markets is conducted by agents acting for principals, using "mark-to-market" contracts whereby performance is assessed using security market prices. We endogenize contract choices, information production, informed trading, and security price informativeness. But there is a contract externality. Prices are informative only because other principals induce their agents to trade based on privately produced information. The agent-traders then have an incentive to coordinate and shirk. The market price is less informative, reducing the effectiveness of mark-to-market contracts. By using managerial discretion to vary the contract type unpredictably, principals mitigate traders' coordinated manipulation and improve price informativeness. (JEL D82, D86, G12)

JEL-codes: D82 D86 G12 (search for similar items in EconPapers)
Date: 2010
Note: DOI: 10.1257/mic.2.4.137
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Citations: View citations in EconPapers (3)

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