Information Diversity and Complementarities in Trading and Information Acquisition: Complementarities in Trading and Information Acquisition

By Itay Goldstein, Liyan Yang. 2015

137 citations recorded by the source corpus.

We analyze a model in which different traders are informed of different fundamentals that affect the security value. We identify a source for strategic complementarities in trading and information acquisition: aggressive trading on information about one fundamental reduces uncertainty in trading on information about the other fundamental, encouraging more trading and information acquisition on that fundamental. This tends to amplify the effect of exogenous changes in the underlying information environment. Due to complementarities, greater diversity of information in the economy improves price informativeness. We discuss the relation between our model and recent financial phenomena and derive testable empirical implications. SECURITY PRICES REFLECT INFORMATION available to traders about future payoffs. Uncertainty about these payoffs typically involves multiple dimensions. Obvious examples include multinational firms, for which there is uncertainty originating from the different countries where the firm operates, and conglomerates, for which there is uncertainty about the different industries the firm operates in. More generally, even focused firms are exposed to multiple dimensions of uncertainty: cash flows depend on the demand for firms’ products and the technology they develop, on firms’ idiosyncratic developments and the way they are affected by the macroeconomy or the industry, and on the success of firms’ operations in traditional lines of business and in new speculative lines of ∗Itay Goldstein is with Wharton School, University of Pennsylvania and Liyan Yang is with Joseph L. Rotman School of Management, University of Toronto. This paper was previously circulated under the title “Information diversity and market efficiency spirals.” We thank the Editor (Bruno Biais) and three anonymous referees for constructive comments that have significantly improved the paper. We also thank Efstathios Avdis, Bradyn Breon-Drish, Henry Cao, Pierre Chaigneau, Alex Edmans, Vincent Glode, Richard Kihlstrom, Péter Kondor, Albert “Pete” Kyle, Doron Levit, Igor Makarov, Konstantin Milbradt, Tarun Ramadorai, Bart Taub, Dimitri Vayanos, Xinli Wang, Kathy Yuan, and audiences at the Georgia Tech Finance Seminar, the HEC Montreal Finance Seminar, the Maryland Smith School Finance Seminar, the Princeton University Finance Seminar, the Purdue Finance Seminar, the Rutgers Finance Seminar, the Virginia McIntire School Finance Seminar, the Wharton Finance Seminar, the 2012 Adam Smith Asset Pricing Conference (Oxford, the United Kingdom), the 2012 EFA Annual Meeting (Copenhagen, Denmark), the 2012 SED Annual Meeting (Limassol, Cyprus), the 2012 Tel Aviv Finance Conference (Tel Aviv, Israel), the 2013 NFA Annual Meeting (Quebec City, Canada), and the 2013 WFA Annual Meeting (Tahoe, the United States) for comments and suggestions. Yang thanks the Social Sciences and Humanities Research Council of Canada for financial support. DOI: 10.1111/jofi.12226

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/4bb806c9349bfebc1facf3282dfb9ede7a681351

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Citations in the corpus

The source of information in prices and investment-price sensitivity (2017, background): “6 As in Goldstein and Yang (2015) , both components of assets in place are drawn from the same distribution and thus have the same precision, which significantly simplifies the analysis. profitability (external information on industry prospects).”
Good disclosure, bad disclosure (2019, unknown): “Finally, it is important to note that in Bond and Goldstein (2015) , there is no direct positive effect of disclosing information on real efficiency, since the information being disclosed is already known to the decision maker (the government in their model).”