Financial Disclosure and Market Transparency with Costly Information Processing*

Bargaining with incomplete information

Marco Di Maggio and Marco Pagano

Review of Finance, 2018, vol. 22, issue 1, 117-153

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; Financial literacy; Limited attention; OTC markets (search for similar items in EconPapers)
Date: 2018
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Related works:
Working Paper: Financial Disclosure and Market Transparency with Costly Information Processing (2016)
Working Paper: Financial Disclosure and Market Transparency with Costly Information Processing (2014)
Working Paper: Financial disclosure and market transparency with costly information processing (2014)
Working Paper: Financial Disclosure and Market Transparency with Costly Information Processing (2012)
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