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Information Disclosure in Financial Markets

Itay Goldstein () and Liyan Yang
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Itay Goldstein: Department of Finance, Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104

Annual Review of Financial Economics, 2017, vol. 9, issue 1, 101-125

Abstract: Information disclosure is an essential component of regulation in financial markets. In this article, we provide a cohesive analytical framework to review certain key channels through which disclosure in financial markets affects market quality, information production, efficiency of real investment decisions, and traders’ welfare. We use our framework to address four main aspects. First, we demonstrate the conventional wisdom that disclosure improves market quality in an economy with exogenous information. Second, we illustrate that disclosure can crowd out the production of private information and that its overall market-quality implications are subtle and depend on the specification of information-acquisition technology. Third, we review how disclosure affects the efficiency of real investment decisions when financial markets are not just a side show, as real decision makers can learn information from them to guide their decisions. Last, we discuss how disclosure in financial markets affects investors’ welfare through changing trading opportunities and through beauty-contest motives. Overall, our review suggests that information disclosure is an important factor for understanding the functioning of financial markets and that there are several trade-offs that should be considered in determining its optimal level.

Keywords: crowding-out effect; disclosure; learning from prices; market quality; real efficiency; welfare (search for similar items in EconPapers)
JEL-codes: D82 G14 M41 (search for similar items in EconPapers)
Date: 2017
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