Information provision in over-the-counter markets

Tri Vi Dang and Mike Felgenhauer

Journal of Financial Intermediation, 2012, vol. 21, issue 1, 79-96

Abstract: This paper analyzes endogenous information provision and purchase in over-the-counter (OTC) markets. On the supply side the optimal strategy of an information provider consists of selling identical information to all OTC traders. On the demand side OTC traders have an incentive to buy information from the same provider. If the incumbent information provider charges not too high a price, then an entrant firm has no demand even though it offers less expensive information of the same quality. This paper provides a rationale for the high level of market power in the industry for financial market data and credit rating services as well as why institutional traders may have no demand for a finer rating system. In addition, this paper shows that it is welfare improving for the security issuer to pay for rating services rather than having OTC traders purchase costly rating reports.

Keywords: Information provision; Information acquisition; Over-the-counter trading; Rating services (search for similar items in EconPapers)
JEL-codes: C78 D82 D83 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:21:y:2012:i:1:p:79-96

DOI: 10.1016/j.jfi.2011.05.001

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