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Market-Based Solutions to Vital Economic Issues


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Market-Based Solutions to Vital Economic Issues
Jul 14, 2017

When Transparency Improves, Must Prices Reflect Fundamentals Better?


No. In the presence of speculative opportunities, investors can learn about both asset fundamentals and the beliefs of other traders. We show that this learning exhibits complementarity: learning more along one dimension increases the value of learning about the other. As a result, regulatory changes may be counterproductive. First, increasing transparency (i.e., making fundamental information cheaper to acquire) can make prices less informative when investors respond by learning relatively more about others. Second, public disclosures can discourage private learning about fundamentals while encouraging information acquisition about others. Accordingly, disclosing more fundamental information can decrease overall informational efficiency by decreasing price informativeness.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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