Article | Review of Finance | February 2018

Financial Disclosure and Market Transparency with Costly Information Processing

by Marco Di Maggio and Marco Pagano

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. As a consequence, asset sellers will oppose both the disclosure of fundamentals and trading transparency. This is socially inefficient if a large fraction of market participants are speculators, and hedgers have low processing costs. But in these circumstances, forbidding hedgers’ access to the market may dominate mandatory disclosure.

Keywords: financial disclosure; Information Processing; liquidity; market transparency; rational inattention; Information; Financial Liquidity; Knowledge Use and Leverage; Corporate Disclosure; Financial Markets; Investment;

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Citation:

Di Maggio, Marco, and Marco Pagano. "Financial Disclosure and Market Transparency with Costly Information Processing." Review of Finance 22, no. 1 (February 2018): 117–153.

About the Author

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Marco Di Maggio
Ogunlesi Family Associate Professor of Business Administration
Finance

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