Information network, public disclosure and asset prices

Abstract

We propose in this paper a noisy rational expected equilibrium (NREE) model by taking both public and private information into account with an embedded information network structure among market traders. We derive closed-form expressions for five variables about market reaction and market quality as a function of the topological structure of the network, and we obtain several novel results. First, the information network directly affects the price discovery of private information, but it indirectly influences the price discovery of public information. Second, network connectedness negatively influences both price change and trading volume, while network uniformity only affects trading volume positively and does not impact price change. Third, network connectedness suppressed the marginal effect of public disclosure on market quality, i.e., the information sharing among traders weakens the market quality improvement caused by public disclosure. We extend the NREE model and document a crowding-out effect of information networks in the price discovery of public disclosure. The mechanism of the crowding-out effect also provides a theoretical interpretation of the under-reaction of public disclosure in the market.