Private Information Acquisition Research Articles

Reporting bias and feedback effect

AbstractStock prices often provide firm managers with new information that can be used in real decisions. Studies generally focus on the ex ante disclosure policy and show that the presence of market feedback crowds out firms' disclosure. We instead examine a manager's ex post biasing incentives and find that market feedback amplifies overreporting bias, but not necessarily underreporting bias, due to three interacting effects. First, the manager biases the report more with feedback since decreased information quality crowds in the speculator's private information acquisition and improves investment efficiency, regardless of the reporting scenario (the information rationing effect). Second, the manager biases more in the overreporting scenario and less in the underreporting scenario, because reporting more favorable information crowds in private information acquisition, as the speculator expects a higher subsequent investment and therefore higher trading profits (the investment scale effect). Third, market feedback influences reporting bias not only through the speculator's information acquisition but also directly through the market maker's pricing function. Specifically, the market maker decreases the price discount, as he expects that the manager may learn correct information from the price and may invest more efficiently. Expecting a lower price penalty in the presence of feedback, the manager biases more in the overreporting scenario and less in the underreporting scenario (the investment correction effect). Overall, our results suggest that granting firms reporting discretion could improve investment efficiency and firm value when managers can learn through price.

Dose analysts’ private information acquisition impact on stock price crash risk? Based on Chinese Market

Dose analysts’ private information acquisition impact on stock price crash risk? Based on Chinese Market

Endogenous information acquisition and disclosure of private information in a duopoly

This study examines duopolies' incentives to acquire and disclose information about their unknown private costs of production in a Cournot model under three different information disclosure regimes: full disclosure, full concealment, and strategic disclosure regimes. We decompose the value of information into three parts: the value of a firm learning its own type, the value of knowing the rival's type, and the value of disclosing its information to the rival. We show that firms are more incentivized to acquire information in the strategic disclosure regime than in the full disclosure and full concealment regimes. The direct effect of information disclosure decreases consumer surplus for a given information structure, and the indirect effect may increase consumer surplus by providing firms with stronger incentives to acquire information. Furthermore, information acquisition and disclosure always increase the total surplus. Our findings shed light on how regulatory arrangements affect firms' information environment and help evaluate the effectiveness of information disclosure regulation.

Public disclosure and private information acquisition: A global game approach

This paper studies public information disclosure in a model of dynamic financial markets with endogenous information acquisition. Due to an information complementarity, multiple equilibria may emerge, complicating comparative statics analysis. By adding noise to agents' information costs, we establish equilibrium uniqueness using global-game techniques. We show that while public information always crowds out private information in all underlying equilibria, it can crowd in private information acquisition in the unique global-game equilibrium. This result is driven by the strategic uncertainty introduced through the global-game refinement. The crowding-in effect is more pronounced when there is a high level of fundamental uncertainty, which supports the case for greater information disclosure during times of increased market volatility.

Private Information Acquisition via Freedom of Information Act Requests Made to the Securities and Exchange Commission

ABSTRACT There is limited evidence about when, why, and which individuals incur costs to acquire nonpublic information about a firm, largely due to the difficulty of observing private information acquisition. To overcome this difficulty, we obtain data on Freedom of Information Act (FOIA) requests submitted to the Securities and Exchange Commission (SEC). We predict and find that perceived information asymmetry between managers and outsiders resulting from both proprietary and agency costs triggers FOIA search. We categorize organizations making FOIA requests using their business descriptions and find that many, including law and intellectual property firms, are not expressly interested in obtaining information for near-term equity trading. Instead, their search activity relates to determinants beyond financial characteristics, including patent litigation and executive turnover. Taken together, we provide evidence on private information search by a relatively unexamined set of organizations and shed new light on the function of the SEC’s Office of FOIA Services. JEL Classifications: D82; D83; M41.

Finding Fortune: How Do Institutional Investors Pick Asset Managers?

Abstract We propose and test a framework of private information acquisition and decision timing for asset allocators hiring outside investment managers. Using unique data on due diligence interactions between an institutional allocator and 860 hedge fund managers, we find that the production of private information complements public information. The allocator strategically chooses how much proprietary information to collect, reducing due diligence time by 18 months and improving outcomes. Funds selected by the manager outperform those not selected by 9$\%$ over 20 months. The outperformance relates to the allocator learning about fund return-to-scale constraints and manager skill before other investors.

Endogenous lemons markets and information cycles

This article develops a dynamic stochastic general equilibrium model in which information on capital quality is asymmetric and the degree of information asymmetry varies endogenously with the state of the economy, amplifying the shocks. Firms hold capital and borrow to cover operating expenses. Production is subject to idiosyncratic shocks. When a firm’s realized revenue is not enough to cover its debt obligation, the firm must liquidate capital in a market that is subject to the lemons problem. During production, some of the firms' capital depreciates, becoming “lemons”. Firms initially have no information on which units of their capital have depreciated, but they can acquire private information on the quality of their own capital at a cost, which allows them to select low-quality capital to sell during liquidation. Although private information acquisition can be individually beneficial, it generates the lemons problem, decreasing market liquidity and distorting economic allocations. Adverse shocks trigger additional private information acquisition, exacerbating the lemons problem. The model can account for the business cycle patterns in the U.S., and in particular the sizable fluctuations of capital reallocation.

The Social Value of Public Information When Not Everyone is Privately Informed

When there is strategic complementarity and all agents have access to public information, but only a subset of them has access to private information, strategic complementarity within the subset of privately-informed agents enhances the focal power of public information. The resulting expected social welfare function is always convex in the precision of both private and public information, compared to the symmetric information case. The welfare gain from increasing the precision of the public information always exceeds the welfare loss from the underutilization of private information by a subset of agents. The findings are robust to several extensions such as biased perceptions about public signals and costly acquisition of private information. The results support the use of public information campaigns to change agent behavior regarding vaccine hesitancy and social injustices, and may also shed light on why consumer expectations of economic variables consistently differ from professional forecasts.

Private communication and management forecasts: Evidence from corporate site visits

AbstractResearch Question/IssueThis paper investigates whether the communication between managers and corporate site visitors facilitates managerial learning in improving management forecast accuracy.Research Findings/InsightsUsing corporate site visit (CSV) data from 2009 to 2016, we find that the frequency of corporate site visits is positively related to management forecast accuracy. The positive relationship between corporate site visits and forecast accuracy is stronger when visitors have greater expertise and advanced industry knowledge and when firms are visited during a period of high business uncertainty and are subject to high sensitivity to industry shocks. These findings are consistent with the managerial learning hypothesis. Our results are robust to endogeneity concerns and alternative CSV measures.Theoretical/Academic ImplicationsPrevious literature on voluntary disclosure assumes that managers are endowed with a private set of information and decide how much of that to reveal. In this paper, we find that corporate site visits serve as a communication channel through which managers learn from investors. Overall, we provide evidence that private communication is a two‐way channel through which visitors learn useful information from managers and vice versa.Practitioner/Policy ImplicationsWe provide evidence that the private information acquisition process is also a channel of information sharing that increases management forecast accuracy. Our results could be useful to policymakers who may care about the information acquisition cost of investors when evaluating the benefit of corporate site visits.

Social Proximity, Information, and Incentives in Local Bank Lending

Abstract Exploring the role of social proximity in bank lending using a proprietary data set, we uncover evidence of a significant social proximity effect on private information acquisition. Local loan officers have better information to identify higher-quality borrowers through improved screening. This advantage is greater when firms have higher information asymmetry and lower ratings. Results suggest that sociocultural resources drive locals’ informational advantages and improve their lending performance. Importantly, we find that the social proximity advantage interacts with loan officer incentives. Strong evidence suggests that loan officers can be incentivized to use their social proximity advantage to make better loans. (JEL G12, G13) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Single vs. multiple disclosures in an experimental asset market with information acquisition

We conduct laboratory experiments to study whether increasing the number of independent public signals in an economy with endogenous private information is an effective measure to promote the acquisition of information and to enhance price efficiency. We observe that the release of public information crowds out the traders' demand for private information under a single disclosure while favoring private information acquisition under multiple disclosures. The latter measure improves price accuracy in forecasting the asset fundamental value. However, multiple disclosures do not eliminate the adverse effect of market overreaction to public information, becoming a potential source of fragility for the financial system.

Dynamics of Research and Strategic Trading

Abstract We study how dynamic research affects information acquisition in financial markets. In our strategic trading model, the trader performs costly research to generate private information but does not always succeed. Optimal research activity responds to market conditions and generates novel implications. First, more frequent public disclosures can “crowd in” private information acquisition, increase price informativeness, and harm liquidity, instead of “leveling the playing field.” Second, observed research activity does not necessarily imply that traders are better informed. Finally, improvements in research effectiveness or higher market participation by uninformed investors can simultaneously increase price informativeness and liquidity.

In Defense of Limited Manufacturing Cost Control: Disciplining Acquisition of Private Information by Suppliers

ABSTRACT When a firm's input supplier can acquire and misreport private information to gain an edge in negotiations, we show that the firm can blunt the supplier's informational advantage by permitting inefficiencies in its own internal production. Specifically, we establish that a modest increase in the cost of the input(s) a firm makes internally credibly commits it to be more aggressive in negotiations with a supplier for the input(s) the firm buys. Recognizing that its potential information rents will be limited, the supplier, in turn, becomes less aggressive in information acquisition. The paper fully characterizes the equilibrium—the firm's investments, the supplier's information acquisition and reporting decisions, and the terms of trade—to demonstrate that often-maligned internal bloat can be an endogenous facilitator of efficient outsourcing.

Disclosure Processing Costs and Market Feedback Around the World

We study how disclosure processing costs affect managers’ ability to learn from their own firms’ stock price and incorporate this information into their investment decisions. To provide evidence on this issue, we examine country-level adoptions of centralized electronic disclosure systems. These systems, which digitize and centralize firm disclosures, are among regulators’ most critical technological interventions to reduce disclosure processing costs for investors. Consistent with CEDS crowding out investors’ private-information acquisition, which induces managers to learn less from their stock price, we find a significant decrease in managers’ investment sensitivity to price following these adoptions. Leveraging country-level variation, we also show these effects are heterogeneous across several country-specific dimensions. We find that decreased managerial learning is greatest in places that benefit most from CEDS: smaller and more opaque countries and those with better-developed platforms. Overall, our results show technology that reduces disclosure processing costs have real effects on the global economy.

The Social Value of Public Information When Not Everyone is Privately Informed

When there is strategic complementarity and all agents have access to public information, but only a subset of them has access to private information, strategic complementarity within the subset of privately-informed agents enhances the focal power of public information. The resulting expected social welfare function is always convex in the precision of both private and public information, compared to the symmetric information case. The welfare gain from increasing the precision of the public information always exceeds the welfare loss from the underutilization of private information by a subset of agents. The findings are robust to several extensions such as biased perceptions about public signals and costly acquisition of private information. The results support the use of public information campaigns to change agent behavior regarding vaccine hesitancy and social injustices, and may also shed light on why consumer expectations of economic variables consistently differ from professional forecasts.

Company Visit Disclosure Regulation and Analysts’ Information Acquisition

There is a debate on whether company visits, an important channel of analysts’ information acquisition, should be regulated similar to management disclosure under Regulation Fair Disclosure. Exploiting a Shenzhen Stock Exchange regulation, this study examines the impact of forcing the timely disclosure of analysts’ company visits on analysts’ information acquisition. We find that the regulation creates a chilling effect on analysts’ private information acquisition activities, negatively affecting analysts’ stock coverage, company visits and research report issuance. However, for the analysts who do issue earnings forecasts following the regulation, we find no evidence that the accuracy of such forecasts is lower, consistent with a rational expectation equilibrium.

Endogenous Acquisition of Multi-Dimensional Information in a Strategic Trading Model

We analyze a strategic trading model with endogenous acquisition of multi-dimensional costly private information. We find that integer constraints on the number of informed traders, coupled with the interactions among different types of informed traders, lead to multiplicity and nonexistence of equilibria in the information market. Multiplicity stems either from information substitutability or from information complementarity, and nonexistence stems from the combined effect of information substitutability and information complementarity. Integer constraints also lead to asymmetric equilibria even when the model setup is symmetric. Under integer constraints, the fixed point theorem is no longer applicable and new methodologies are developed to prove the existence of equilibria as well as to find specific solutions for equilibria.

Endogenous Lemons Markets and Information Cycles

I study a dynamic stochastic general equilibrium model in which information on capital quality is asymmetric and the degree of information asymmetry varies endogenously with the state of the economy, amplifying the shocks. Firms hold capital and borrow to cover their operating expenses. Production is subject to idiosyncratic shocks. When a firm's realized revenue is not enough to cover its debt obligation, that firm has to liquidate capital in a market that is subject to the lemons problem. During production, some of the firm's capital depreciates and becomes ``lemon''. Firms initially have no information on which units of their capital have depreciated, but can acquire private information on their own capital at a cost, which allows them to select low-quality capital to sell when liquidation takes place. Private information can be individually beneficial, but creates the lemons problem, which decreases market liquidity and distorts economic allocations. Adverse shocks trigger additional private information acquisition, exacerbating the lemons problem. The model can account for the business cycle patterns in the U.S., and in particular, the sizable fluctuations of capital reallocation.

Restrictions on Privacy and Exploitation in the Digital Economy: A Market Failure Perspective

We discuss how the acquisition of private information by default without compensation by digital platforms such as Google and Facebook creates a market failure and can be grounds for antitrust enforcement. To avoid the market failure, the default in the collection of personal information has to be changed by law to “opt-out.” This would allow the creation of a vibrant market for the sale of users’ personal information to digital platforms. Assuming that all parties are perfectly informed, users are better off in this functioning market and digital platforms are worse off compared to the default opt-in. However, just switching to a default opt-in will not restore competition to the but for world because of the immense market power and bargaining power towards an individual user that digital platforms have acquired. Digital platforms can use this power to reduce the compensation that a user would receive for his/her personal information compared to a competitive world. Additionally, it is likely that the digital platforms are much better informed than the user in this market, and can use this information to disadvantage users in the market for personal information.

Must Public Information Always Crowd Out Private Information?

This paper studies the impacts of public information release in a class of models with strategic information acquisition. Due to the presence of strategic complementarity, multiple equilibria can arise, creating difficulty in analyzing comparative statics. We develop a methodology to apply global-game refinement in this setting and use it to study a model with a dynamic complementarity in information acquisition. The resulting unique equilibrium is shown to have a property that none of the underlying equilibria have: while in all the underlying equilibria public information always crowds out private information, in the global-game equilibrium public information can crowd in more private information acquisition. The crowding-in effect is more pronounced when fundamental uncertainty is high and reverts back to crowding out when uncertainty is low. Omitting this effect could lead the regulator to disclose too little public information especially in recessions, which are often associated with rising uncertainty.