
Investors seek information to guide their investment decisions and maximize their profits. These information-acquisition activities are often kept secret. However, some investors voluntarily disclose such activities, and some regulators have mandates (such as the Regulation Fair Disclosure in the U.S. and China’s Shenzhen Stock Exchange requiring the disclosure of investors’ site visits) on their disclosure. Yan Xiong of HKUST and a colleague ask how the visibility of investors’ information-gathering behaviors impacts financial markets and the decisions made by investors and companies.
“Sophisticated investors often go to great lengths to conceal and erase their footprints,” say the researchers.” Amidst increasing demands—and requirements—for information transparency, the authors develop a novel model that allows for “different degrees of observability surrounding investors’ information-acquisition activities in financial markets.”
“The innovation of our model is its introduction of a communication technology that sends general public messages,” say the researchers, “which may contain information regarding the precision levels of private information acquired by investors.” They apply this model to the real-life setting of financial institutions’ corporate site visits, “an effective but often costly information-acquisition strategy.”
The authors identify two effects of information-acquisition disclosure. The first is a “pricing effect” that occurs between investors and a market maker, which can either encourage or discourage information acquisition. The second is a “competition effect” that occurs between investors and encourages information acquisition. The interplay of these effects determines how the observability of information acquisition influences market outcomes and investors’ information acquisition and trading behavior.
“Our analysis sheds light on when investors are willing to voluntarily disclose their otherwise secretive site visits,” the authors explain, “as well as on the effectiveness and consequences of mandatory disclosure.” They find that mandatory disclosure “causes investors to acquire less precise information and improves their payoff and market liquidity but worsens market efficiency.”
Along with their important theoretical implications, these findings will help policymakers to weigh up the costs and benefits of mandatory disclosure of information-acquisition activities.