Precision Of Private Information Research Articles

Beliefs Aggregation and Return Predictability

ABSTRACTWe study return predictability using a model of speculative trading among competitive traders who agree to disagree about the precision of private information. Although traders apply Bayes' Law consistently, returns are predictable. In addition to trading on long‐term fundamental value, traders also trade on perceived short‐term opportunities arising from foreseen future disagreement, as in a Keynesian beauty contest. Contradicting conventional wisdom, this short‐term speculation dampens price fluctuations and generates time‐series momentum. Model calibration shows quantitatively realistic patterns of return dynamics. Consistent with empirical evidence, our model predicts more pronounced momentum for stocks with higher trading volume.

Information Inequality and Role of Public Information

Transparent disclosures of public information might be one natural policy to reduce information inequality among individuals. We conduct a welfare analysis of such policy by introducing ex-ante heterogeneity in individuals' private information in a class of economies with dispersed information and externalities. We find that, paradoxically, welfare unambiguously increases when information inequality widens through greater precision of private information for the already informationally-rich individuals. We also show that the greater the information inequality, the more likely that public information reduces welfare. Our findings suggest caution in making information policies that aim to narrow informational gap with better public information.

Smart energy storage management via information systems design

Enabled by smart meters and Internet of Things (IoTs) technologies, we are now able to harness information systems and automatize the management of energy storages. Motivated by applications such as renewables integration and electrification of transportation, the paradigm shift towards smart-cities naturally inspires information systems design for energy storages. The goal of this paper is to understand the economic value of future market information to increase the efficiency of the energy market. From storages’ perspective, we investigate energy storages’ optimal decentralized buying and selling decisions under market uncertainty. Different potential policy interventions are discussed: (1) providing a publicly available market forecasting channel; (2) encouraging decentralized storages to share their private forecasts with each other; (3) releasing additional market information to a targeted subset of storages exclusively. Through these system level discussions, we evaluate different information management policies to coordinate storages’ actions and improve their profitability. The key findings of this work include (1) a storage's payoff first increases then decreases in its private information precision. The over-precision in forecasts can lead to even lower payoffs; (2) communication among the storages could fail to achieve a coordinated effort to increase market efficiency; (3) it is optimal to release additional information to a subset of energy storages exclusively by targeted information release.

The Lucas imperfect information model with imperfect common knowledge

In the Lucas imperfect information model, output responds to unanticipated monetary shocks. We incorporate more general information structures into the Lucas model and demonstrate that output also responds to (dispersedly) anticipated monetary shocks if the information is imperfect common knowledge. Thus, the real effects of money consist of the unanticipated part and the anticipated part, and we decompose the latter into two effects, an imperfect common knowledge effect and a private information effect. We then consider an information structure composed of public and private signals. The real effects disappear when either signal reveals monetary shocks as common knowledge. However, when the precision of private information is fixed, the real effects are small not only when a public signal is very precise, but also when it is very imprecise. This implies that a more precise public signal can amplify the real effects and make the economy more volatile.

Endogenous Public Information and Welfare in Market Games

This paper performs a welfare analysis of markets with private information in which agents can condition on noisy prices in the rational expectations tradition. Pricecontingent strategies introduce two externalities in the use of private information: a payoff (pecuniary) externality related to aggregate volatility and a learning externality. The impact of the first depends on whether competition is of the strategic substitutes or complements variety and the second induces agents to put too little weight on private information. We find that with strategic substitutes and when the learning externality is not very strong agents put too much weight on private information and prices are too informative. This will happen in the normal case where the allocational role of price prevails over its informational role. Under strategic complementarity there is always under-reliance on private information. The welfare loss at the market solution may be increasing in the precision of private information. The analysis provides insights into optimal business cycle policy and a rationale for a Tobin-like tax for speculators in financial markets.

Transaction Risk, Derivative Assets, and Equilibrium

We describe a rational expectations model in which there is not only asymmetric information about payoffs but also asymmetric information about the preference, proportion and precision of private information of investors. We define this payoff-irrelevant risk as transaction risk, which is described by market state variables unrelated to payoffs. When derivative assets are introduced, the prices of the derivative assets can reveal information about transaction risk. Due to the informational role of derivative-asset prices, introducing derivative assets can increase social welfare and the price of the underlying asset even though no investors are trading in these derivative assets.

Qualitative Disclosure and Changes in Sell‐Side Financial Analysts' Information Environment

AbstractWe examine a routine and timely disclosure, earnings press releases, to determine the extent to which several novel qualitative elements of such disclosures are associated with changes in sell‐side financial analysts' information environment. Using a comprehensive set of GARCH‐based (generalized autoregressive conditional heteroscedasticity) proxies, we examine how disclosure readability's components, across‐document textual similarity, and within‐document lexical diversity alter analysts' information environment. We find that readability in the form of shorter sentences, textual similarity, and lexical diversity are strongly related to decreases in analysts' uncertainty. Further, shorter sentences and lexical diversity improve both public and private information precision, whereas similarity affects solely analysts' private information precision. While the GARCH‐based proxies allow us to alleviate concerns regarding potentially spurious inferences (Sheng and Thevenot 2012), we note as a caveat that such an estimation restricts our inferences to large, stable, and heavily followed firms. These findings should be of interest to analysts who may wish to explore the latent information contained within the qualitative elements of disclosure, regulators who direct the form and content of disclosure, and academics who study the use (and possible misuse) of various forms of information and its presentation.

The impact of cross-listing in the United States on the precision of public and private information

Our study explores the source of improvement in the information environment from cross-listing shares on US stock exchanges. Are the improvements from cross-listing in the United States achieved more through public or private information channels? While we find evidence that US cross-listing is significantly associated with improvements in both public and private information precision, the association is stronger between cross-listing and improvements in private information precision. This suggests that the improvement in the information environment for cross-listed firms is largely due to analysts expending more effort on firm-specific information discovery as opposed to broader improvements in overall public disclosure. This research should influence international business scholars that improvements in the information environment do not occur solely through public information channels. They also occur through investors’ private information search activities.

The social value of public information with convex costs of information acquisition

In a beauty contest framework, welfare can decrease with public information if the precision of private information is exogenous, whereas welfare necessarily increases with public information if the precision is endogenous with linear costs of information acquisition. The purpose of this paper is to reconcile these results by considering nonlinear costs of information acquisition. The main result of this paper is a necessary and sufficient condition for welfare to increase with public information. Using it, we show that costs of information acquisition are linear if and only if welfare necessarily increases with public information. Thus, welfare can decrease with public information for any strictly convex costs. This is because convex costs mitigate the so-called crowding-out effect of public information on private information, thereby making the social value of public information with endogenous precision closer to that with exogenous precision.

The Effects of Public Information with Asymmetrically Informed Short‐Horizon Investors

ABSTRACTThis paper analyzes the effects of public information in a perfect competition trading model populated by asymmetrically informed short‐horizon investors with different levels of private information precision. We first show that information asymmetry reduces the amount of private information revealed by price in equilibrium (i.e., price informativeness) and can lead to multiple linear equilibria. We then demonstrate that the presence of both information asymmetry and short horizons provides a channel through which public information influences price informativeness and equilibrium uniqueness. We identify conditions under which public information increases or decreases price informativeness, and when multiple equilibria may arise. Our analysis shows that public information not only directly endows prices with more (public) information, it can also have an important indirect effect on the degree to which prices reveal private information.

Overconfidence and the Rational Expectations Model of the Term Structure of Interest Rates

We propose a behavioral explanation for the widely reported rejection of the rational expectations model of the term structure of interest rates. We distinguish between public and private information and show that overconfidence among investors about the precision of private information can account for the empirical failure of the rational expectations model. Using a simulation experiment calibrated with data on US interest rates, we demonstrate that only a small degree of investor overconfidence is needed to replicate the principle features of the rejections of the rational expectations model that have been documented in different tests in the empirical literature.

The Effects of Public Information with Asymmetrically Informed Short-Horizon Investors

This paper analyzes the effects of public information in a perfect competition trading model populated by asymmetrically informed short-horizon investors with different levels of private information precision. We first show that information asymmetry reduces the amount of private information revealed by price in equilibrium (i.e., price informativeness) and can lead to multiple linear equilibria. We then demonstrate that the presence of both information asymmetry and short horizons provides a channel through which public information inauences price informativeness and equilibrium uniqueness. We identify conditions under which public information increases or decreases price informativeness, and when multiple equilibria may arise. Our analysis shows that public information not only directly endows prices with more (public) information, it can also have an important indirect effect on the degree to which prices reveal private information.

Measuring firm-specific informational efficiency without conditioning on a public announcement

We exploit the availability of active single-stock futures on India's National Stock Exchange (NSE) to provide estimates of overall informational efficiency, without conditioning on a public announcement. The key is the estimation of the primitive parameters of an asset pricing model with private information and noise. The variance–covariance parameters governing futures prices and terminal values can be inverted to obtain the Maximum Likelihood Estimators (MLEs) of the precision of private information and the variance of liquidity motivated trades. The Signal-to Signal-plus-Noise (SSN) ratio – our measure of overall informational efficiency – is a function of these primitive parameters. Our primary findings show that there is considerable variation across firms in these parameters despite only large active firms being available for futures trading. We also examine the cross-sectional relationship of this measure of informational efficiency and corporate governance. Overall informational efficiency increa...

Optimal Dynamic Public Communication

This paper builds a dynamic model of the information flow between partially informed financial institutions and a public agency. The financial institutions decide how to allocate their portfolio between a risk-free technology with a known payoff and a risky technology whose payoff is unknown. The public agency learns about the value of the unknown payoff by observing with measurement error the actions of the financial institutions and decides whether to communicate the information at the agency's disposal. The paper characterizes the optimal public communication plan and shows that full transparency (taken as the release of information whenever it is collected) is not always optimal. Instead, optimal plans involve delayed communication, the amount of delay depending on the precision of private information and the size of the agency's measurement error. The explanation of the result lies in the collection process of public information: while releasing information improves the welfare of the agents, it also decreases the informational content of their actions, hampering the agency's learning and reducing the benefits of future public communication.

Information Aggregation and Multiplicity in Creditor Runs: The Role of Public Disclosure

This paper studies the role of public disclosure in a coordination game, in which creditors trade a financial asset of the firm they finance, before deciding whether to rollover lending to the firm. Creditors base their trading and lending decisions on three sources of information: private information, public disclosure, and asset prices. We show that public disclosure plays a critical role in equilibrium outcome of corporate default, through its interaction with private information. Specifically, when public disclosure is sufficiently noisy, unique equilibrium only obtains for intermediate values of the precision of private information; when public disclosure is sufficiently precise, multiple equilibria always emerge. The impact of public disclosure on ex ante run probability and creditor welfare is conditioned on the precision of private information, and (when multiple equilibria exist) which equilibrium is played. We also show that the results hold for at least two categories of financial assets, equity shares and credit derivatives.

Voluntary IFRS Adoption, Analyst Coverage, and Information Quality: International Evidence

ABSTRACTThis study investigates whether and how a firm's voluntary adoption of International Financial Reporting Standards (IFRS) affects financial analysts' decisions to follow the firm, and improves the information environment, as reflected in the precision of the analysts' information set. First, this study finds that firms with voluntary IFRS adoptions attract more analysts than non-adopter firms. Second, it finds that the added disclosure via IFRS adoption contributes to the better precision of the analyst information set. Third, this study finds that the improved precision of total analyst information is attributed to not only an increase in the precision of public information common to all analysts, but also an increase in the precision of private information that is idiosyncratic to a particular analyst. This finding suggests a complementary relation with respect to the effect of IFRS adoption on the quality of public and private information. Finally, further analysis reveals that analyst coverage also improves the precision of information. Specifically, this study provides evidence suggesting that voluntary IFRS adoption is associated with more precise public (common) information, while analyst coverage is associated with more precise private (idiosyncratic) information.

Fair Value Accounting: Information or Confusion for Financial Markets?

The recent financial crisis has led to a critical evaluation of the role that fair value accounting may have played in undermining the stability of the financial system. Reacting to the pressures of banking regulators and governments, standard-setters have brought forward additional guidance on the application of fair value accounting. This paper examines if and how fair value reporting by U.S. commercial banks during the 1996-2009 period influences the quality of information used by financial analysts. Our results show that, overall, the greater the extent of a bank’s assets and liabilities reported at fair value, the more dispersed are analysts’ earnings forecasts. Moreover, as the proportion of assets measured at fair value increases, properties of analysts’ forecasts become less desirable, showing a decrease in the precision of public or private information. The informational properties of fair value disclosure decrease as we move from level 2 to mark-to-model data (level 3). Nevertheless, additional analyses suggest that the disclosure of levels has been beneficial to investors as it enhanced private information precision resulting in more accurate and less dispersed analysts’ forecasts. Finally, the disclosure about the valuation of assets that are measured at fair value on a non-recurring basis reduces accuracy and public information precision while enhancing dispersion.

Multi-unit auctions with private information: an indivisible unit continuous price model

We construct a model of multi-unit auctions in which I bidders bid for two indivisible units of a common value good. Using a first-order approach, we find that there are equilibria in which bidders bid the same price for both units in the discriminatory auction, but not in the uniform auction. When there are only two bidders, under certain conditions, there are linear equilibria for both the discriminatory and the uniform auction formats. In all equilibria, bidders equalize the expected marginal benefit of bidding to the marginal costs of bidding. We show that comparison of the seller’s expected revenue across auction formats depends only on the ratio of the precision of private information to the precision of public information.

Mandatory Adoption of IFRS and Analysts? Forecasts Information Properties

This study examines the properties of the information contained in analysts’ earnings forecasts for mandatory IFRS adopters in Europe for the period 2003-07. We find a significant increase in the precision of both public and private information after switching to IFRS, especially for forecasts pertaining to 2006 and later. However, we are unable to detect a change in the consensus among financial analysts after the mandatory adoption of IFRS. These results suggest that the higher percentage increase in the precision of common information is offset by a proportionate increase in the precision of private information such that consensus among analysts does not change. When exploring analyst-specific precision in more detail, we find that the analysts who are following firms in more than one European country experience the largest post-IFRS improvement in private information precision. These results hold after controlling for factors that are shown in prior research to be correlated with analysts’ information precision measures. Taken together, our results suggest that mandatory adoption of IFRS had a significant and positive effect on the information processing of financial analysts but this did not occur homogeneously across analysts.

Managerial Ownership and Firms' Information Environment

We examine the relation between managerial stock ownership and the firm's information environment. We focus on three dimensions of the information environment: total, public, and private information precisions (Barron, Kim, Lim and Stevens 1998). Our results suggest that firms' total and public information precisions are positively related to managerial ownership. In contrast, there is no clear pattern in private information precision across different levels of managerial ownership. We also observe that managerial ownership has a greater impact on the firm's public information environment after the implementation of Regulation Fair Disclosure, suggesting that the regulation was more effective in terms of improving the firms' public information flow for firms whose managers' interests are better aligned. Collectively, our findings suggest that one of the possible channels through which managerial ownership associates with earnings informativeness and firm value is the firms' public information precision and that managerial incentive alignment plays an important role in how managers respond to a new disclosure regulation.