Flying under the radar: The real effects of anonymous trading |
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| Institution: | 1. Saint Mary''s University, Halifax, NS B3H 3C3, Canada;2. University of Alberta, Edmonton, AB T6C 4G9, Canada;1. Henry B. Tippie College of Business, Department of Finance, University of Iowa, 108 Pappajohn Business Bldg., Iowa City, IA 52242-1994, United States of America;2. Peter T. Paul College of Business and Economics, Department of Accounting and Finance, University of New Hampshire, 10 Garrison Avenue, Durham, NH 03824-2325, United States of America;1. Department of Finance and Economics, Mississippi State University College of Business, Post Office Box 9580, 312K McCool Hall, Mississippi State, MS 39762-9580, United States of America;2. Department of Finance, Banking & Insurance, Appalachian State University Walker College of Business, ASU Post Office Box 32058, 3065 Peacock Hall, Boone, NC 28608, United States of America |
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| Abstract: | Using unique data on TSX Attributed Trading and a new proxy of Tobin's Q that accounts for intangible capital (Peters and Taylor, 2017), we investigate the impact of anonymous trading (AT) on managers' ability to use feedback conveyed by stock prices to improve investment efficiency. We show that AT reduces investment efficiency and that both anonymous buyer-initiated and seller-initiated trades have comparable effects. The negative effect of AT on managerial learning from stock prices is significant only for tangible investments and when disagreement among anonymous traders is high. Taken together, our new evidence indicates that AT distorts investment sensitivity to Tobin's Q, plausibly because anonymity attracts additional (uninformed) liquidity trading, which negatively impacts the effectiveness of asset prices in aggregating private information and in revealing fundamentals. |
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