The rapidity of price adjustments to information

This analysis suggests a relationship between the rapidity of price adjustments to information and the accuracy or reliability of the information, as it is perceived by investors. To understand this relationship, we construct a competitive two-person trading game in which investors use an equilibrium strategy to determine their level of investment in information processing. Then, we relate this equilibrium level to the rapidity of price adjustments. The relationship is subtle, however, and in different circumstances the rapidity of price adjustments may increase or decrease as the level of accuracy or reliability of the information changes. In a final section, we argue that aspects of our analysis may be useful for providing a positive theory for the rapidity of price adjustments in a securities market.     

Information aggregation in a noisy rational expectations economy

This paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset. Each trader conditions his estimate of the return both on his own private source of information and price, which in equilibrium serves as a ‘noisy’ aggregator of the total information observed by all traders. A closed-form characterization of the rational expectations equilibrium is presented. A counter-example to the existence of ‘fully revealing’ equilibrium is developed.     

Correction to: Voluntary disclosure when private information and disclosure costs are jointly determined

Review of Accounting Studies - A Correction to this paper has been published: https://doi.org/10.1007/s11142-021-09623-7     

On the theory of market information efficiency

This paper discusses the concept of market information efficiency and demonstrates the following: As the number of traders who participate in the market becomes large, the variations in the price of a security caused by the variations in traders' beliefs make the market price vary as if traders all knew the ‘true’ distribution of returns on the security. The empirical implications of the analysis are also explored.     

Voluntary disclosure when private information and disclosure costs are jointly determined

Review of Accounting Studies - Classical models of voluntary disclosure feature two economic forces: the existence of an adverse selection problem (e.g., a manager possesses some private...     

The Mayers-Rice conjecture: A counterexample

Mayers and Rice conjecture that an investor with better information will on average plot above the security market line as drawn by uninformed investors. This paper demonstrates that this conjecture is false in general, by constructing a counterexample. However, the Mayers-Rice conjecture is really part of a much broader hypothesis concerning whether increases in expected returns correspond to increases in expected utilities. It is shown that this latter hypothesis is true when the investor has an exponential or logarithmic utility function.     

Foreign competition for shares and the pricing of information asymmetry: Evidence from equity market liberalization

Using the equity market liberalization of 23 emerging market countries between 1996 and 2006, we examine how the degree of competition for a firm's shares affects the price of information asymmetry. We find evidence of a significant decline in the pricing of information asymmetry as countries remove regulatory restrictions on foreign ownership. Our study provides novel evidence on the link between the degree of competitiveness of equity markets and the price of information asymmetry. The work also furthers our understanding of the economic consequences of foreign stock ownership.     

The economics of misreporting and the role of public scrutiny

This paper examines how the ex ante level of public scrutiny influences a manager's subsequent decision to misreport. The conventional wisdom is that high levels of public scrutiny facilitate monitoring, suggesting a negative relation between scrutiny and misreporting. However, public scrutiny also increases the weight that investors place on earnings in valuing the firm. This in turn increases the benefit of misreporting, suggesting a positive relation. We formalize these two countervailing forces–“monitoring” and “valuation”–in the context of a parsimonious model of misreporting. We show that the combination of these two forces leads to a unimodal relation. Specifically, as the level of public scrutiny increases, misreporting first increases, reaches a peak, and then decreases. We find evidence of such a relation across multiple empirical measures of misreporting, multiple measures of public scrutiny, and multiple research designs.