Markets versus Mechanisms

Raphael Boleslavsky, Christopher A Hennessy and David Kelly

The Review of Financial Studies, 2022, vol. 35, issue 7, 3139-3174

Abstract: We establish limitations to the usage of direct revelation mechanisms (DRMs) by corporations seeking decision-relevant information in economies with securities markets. In this environment, posting a DRM increases the informed agent’s outside option: if the agent rejects the DRM, he convinces the market he is uninformed, and he can aggressively trade with low price impact, thereby generating large (off-equilibrium) trading gains. This endogenous outside option may make using a DRM to screen uninformed agents impossible. When screening is possible, solely relying on the market for information is optimal if the increase in outside option is sufficiently large.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

JEL-codes: D83 G32 L14 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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