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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/31610
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| Title: | Should We Regulate Financial Information? |
| Authors: | Kurlat, Pablo
Veldkamp, Laura |
| Issue Date: | 17-Sep-2012 |
| Abstract: | Regulations that require asset issuers to disclose payoff-relevant
information to potential buyers sound like obvious measures to increase
investor welfare. But in many cases, such regulations harm investors. In
an equilibrium model, asset returns compensate investors for risk. By
making payoffs less uncertain, disclosure reduces risk and therefore
reduces return. As high-risk, high-return investments disappear,
investor welfare falls. Of course, information is still valuable to each
individual investor. But acquiring information is like a
prisoners’ dilemma. Each investor is better off with the
information, but collectively investors are better off if they remain
uninformed. The only cases in which providing information improves
investors’ welfare are ones where there would otherwise be severe
asymmetric information. Using a model of information markets, the paper
explores when such outcomes are likely to arise. When we extend the
model so that financial markets with information allocate the real
capital stock more efficiently, these conclusions do not change.
Disclosure improves efficiency, but more efficient firms do not have more
risk and therefore do not offer investors higher return. Instead, they
simply command a higher price, which only benefits the asset issuer.
Since the efficiency gains are fully internalized by asset issuers, who
can choose to disclose without disclosure being mandatory, the efficiency
argument is not a logical rationale for regulation. |
| URI: | http://hdl.handle.net/2451/31610 |
| Appears in Collections: | Economics Working Papers
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