Competition and Incentive to Reveal Information in Financial Markets

Abstract

In this paper I study the impact of competition in financial markets on incentive to reveal information. In a sample of mutual funds, I find that discretionary portfolio disclosure and advertising related expenses decrease with competition. This is interesting, as one would ordinarily expect funds to disclose more often and incur more advertising expenses in response to pressure from competing funds. However, this supports the theory that mutual funds use discretionary portfolio disclosure and advertising as marketing tools to attract new investments in a financial market, where superior relative performance and greater visibility are rewarded with convex payoffs. With higher competition, the likelihood of landing new investments goes down for each fund and at the same time the cost of disclosure goes up. Funds respond by cutting down on costly discretionary disclosure of portfolio holding information and advertising related activities. Thus competition seems to have adverse impact on market transparency and search cost.