Precision Of Public Information Research Articles

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.

The Social Value of Information: A Test of a Beauty and Nonbeauty Contest

AbstractWe demonstrate how the precision of public and private information can be measured and their welfare implications can be assessed. To this end, we develop and apply a procedure to test welfare results from a beauty and nonbeauty contest model based on survey forecasts of interest rates in a large country sample over an extended period of time. In most countries, interest rate forecasts are unbiased. In half of the countries, a higher precision of public information regarding interest rates increases welfare. This applies in particular to small open and emerging market economies. During forward guidance, public information is less precise than private information. On average, forecasters place greater weight on public than private information and rapidly correct errors contained in private information, while errors in public information last over the whole forecast horizon.

The Dynamic Effect of Public Information on Liquidity: From the Perspective of Limited Attention

The financial system is a complex system. The heterogeneous behaviors of investors further increase the degree of its complexity. In this paper, we develop a rational expectations equilibrium model to analyze the effect of public information on market efficiency and liquidity, especially in the market in which investors monitor the market imperfectly. When public information is partly reflected in equilibrium price or the uncertainty about the asset value is great, market efficiency increases with the increase of the precision of public information and the investors holding it. However, when the uncertainty about the fundamental value is small, the increase of the precision of public information worsens market liquidity. And in this market, with the increase of the investors acquiring public information, market liquidity first decreases and then increases. Overall, our results suggest that listed companies should disclose their information accurately by different channels as much as possible, and the regulators should enhance the supervision of information disclosure to enhance market efficiency and liquidity.

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.

Costly information acquisition and public disclosure: implications for investor welfare

ABSTRACTWe explore the combined impacts of costly information acquisition and public disclosure for investors. When there are only outsiders in the market, disclosure with low public information precision is beneficial to them because they can obtain more return by thoroughly utilizing the market-making capacity. When insiders and outsiders coexist in the market, the increase of information cost or disclosed-information precision can improve their welfare by reducing adverse selection risk. When all investors are insiders, reducing information acquisition cost is efficient for welfare improvement.

Majoritarian preference, utilitarian welfare and public information in Cournot oligopoly

Can individual preferences for public information among heterogeneous consumers be aggregated into a meaningful social preference that does not suffer from Condorcet cycles? In a Cournot model where homogeneous producers observe a public signal about an uncertain cost of production prior to taking quantity decisions, we show that the majoritarian preference of consumers for the precision of public information is fairly well behaved so that a Condorcet winner always exists. Under a monotonicity condition on the demand function, we characterize the Condorcet-winning precision in terms of the demand function and the number of firms under which the Condorcet-winning precision (i) hurts consumers' surplus and profits or (ii) remains conflict-free. These results have interesting implications on ‘collective’ Bayesian persuasion by agencies representing consumers, showing that when full transparency maximizes expected consumers' surplus, collective Bayesian persuasion can lead to full opacity, and vice versa.

Can More Public Information Raise Uncertainty? The International Evidence on Forward Guidance

Central banks have used different types of forward guidance, where the forward guidance horizon is related to a state contingency, a calendar date or left open-ended. This paper reports cross-country evidence on the impact of these different types of forward guidance on the sensitivity of bond yields to macroeconomic news, and on forecaster disagreement about the future path of interest rates. We show that forward guidance mutes the response to macroeconomic news in general, but that calendar-based forward guidance with a short horizon counterintuitively raises it. Using a model where agents learn from market signals, we show that the release of more precise public information about future rates lowers the informativeness of market signals and, as a consequence, may increase uncertainty and amplify the reaction of expectations to macroeconomic news. However, when the increase in precision of public information is sufficiently large, uncertainty is unambiguously reduced. JEL Classification: D83, E43, E52, E58

Wealth Inequality: An Informational Perspective

I examine how differences in the ability to identify profitable investment opportunities contribute to wealth inequality. I analyze a model of financial markets with investors heterogeneously informed about future returns. The unconditional wealth share distribution features a thick right-tail populated by the best-informed investors. Wealth inequality increases with the cost of information acquisition and market liquidity. It is non-monotone in the precision of public information and the size of investments delegated to the best-informed investors. I provide bounds for the speed of wealth dynamics. Using data on US households' beliefs, the model can explain the recent dynamics in wealth inequality.

Hidden Profiles in Corporate Prediction Markets: The Impact of Public Information Precision and Social Interactions

Recently, large companies have been experimenting with corporate prediction markets run among their employees. In the present study, we develop an analytical model to analyze the effects of information precision and social interactions on prediction mark

Public Information Precision and Coordination Failure: An Experiment

ABSTRACTMore precise public disclosure reduces uncertainty about economic fundamentals, but it can increase uncertainty about other agents' actions, leading to coordination failure. We conducted a laboratory experiment to study the effects of public information precision and strategic complementarity on coordination failure. Information precision is operationalized in terms of “granularity” (level of detail). We found that (1) granular public disclosure, which is disaggregated and precise, increases the likelihood of coordination failure and decreases coordination efficiency when public information is pessimistic about future economic prospects; (2) the deleterious effect of granular disclosure is stronger when strategic complementarity is high; and (3) higher levels of strategic complementarity decrease coordination efficiency. Overall, the observed likelihood of coordination failure is higher and coordination efficiency is lower than predicted by theory. Our findings have implications for the Federal Reserve's decision to publicly disclose detailed stress test results for distressed banks, and the debate on whether the Public Company Accounting Oversight Board should publicly release reports on firm‐specific quality‐control deficiencies of audit firms.

Can public information promote market stability?

We study the effect of public information revealing part of underlying fundamentals on market stability. It shows that accurate public information reduces the uncertainty faced by informed traders and increases their responsiveness to private information and expected volume. The reverse trading and multiple equilibria arise under lower public information precision and they disappear when public information precision increases sufficiently.

Subjective evaluation versus public information

This paper studies a principal–agent relation in which the principal’s private information about the agent’s effort choice is more accurate than a noisy public performance measure. For some contingencies the optimal contract has to specify ex post inefficiencies in the form of inefficient termination (firing the agent) or wasteful activities that are formally equivalent to third-party payments (money burning). Under the optimal contract, the use of these instruments depends not only on the precision of public information but also on job characteristics. Money burning is used at most in addition to firing and only if the loss from termination is small. The agent’s wage may depend only on the principal’s report and not on the public signal. Nonetheless, public information is valuable as it facilitates truthful subjective evaluation by the principal.

Disclosure Granularity and Coordination Failure: An Experiment

More precise public disclosure reduces uncertainty about economic fundamentals, but it can increase uncertainty about other agents' actions, leading to coordination failure. We conducted a laboratory experiment to study the effects of public information precision and strategic complementarity on coordination failure. Information precision is operationalized in terms of ``granularity'' (level of detail). We found that: (i) granular public disclosure, which is disaggregated and precise, increases the likelihood of coordination failure and decreases coordination efficiency when public information is pessimistic about future economic prospects; (ii) the deleterious effect of granular disclosure is stronger when strategic complementarity is high; and (iii) higher levels of strategic complementarity decrease coordination efficiency. Overall, the observed likelihood of coordination failure is higher and coordination efficiency is lower than predicted by theory. Our findings have implications for the Federal Reserve's decision to publicly disclose detailed stress test results for distressed banks, and the debate on whether the PCAOB should publicly release reports on firm-specific quality-control deficiencies of audit firms.

On the precision of public information and mutual fund performance

I show that mutual fund managers who adjust their portfolio holdings based on changes in the variation of analyst forecasts achieve significantly lower abnormal returns. Utilizing a partially revealing rational expectations equilibrium (REE) setup, I show that an uninformed (hence, unskilled) investor places greater weight on the public signal relative to an informed investor, given an increase in the precision of public information. Following Kacperczyk and Seru, I formulate a new measure of managerial skill based on the standard deviation of analyst recommendations. This measure, dubbed RPIσ, captures the sensitivity of changes in mutual fund portfolio holdings because of changes in the standard deviation of analyst forecasts. Statistical evidence shows that abnormal returns decrease in RPIσ. The results are robust to various conventional performance benchmarks and alternative formulations of RPIσ using analyst price targets, earnings per share forecasts and coefficients of variation.

Experimental Design to Persuade

A sender chooses ex ante how information will be disclosed ex post. A receiver obtains public information and information disclosed by the sender. Then he takes one of two actions. The sender wishes to maximize the probability that the receiver takes the desired action. I show that the sender optimally discloses only whether the receivers utility is above a cutoff. I derive necessary and sufficient conditions for the senders and receivers welfare to be monotonic in information. Most notably, the senders welfare increases with the precision of the senders potential information and decreases with the precision of public information.

Experimental design to persuade

A sender chooses ex ante how information will be disclosed ex post. A receiver obtains public information and information disclosed by the sender. Then he takes one of two actions. The sender wishes to maximize the probability that the receiver takes the desired action. The sender optimally discloses only whether the receiver's utility is above a cutoff. I derive necessary and sufficient conditions for the sender's and receiver's welfare to be monotonic in information. In particular, the sender's welfare increases with the precision of the sender's information and decreases with the precision of public information.

Optimal policy intervention, constrained obfuscation and the social value of public information

We study the welfare implications of public information precision in a beauty contest framework allowing for optimal stabilization policies and information obfuscation. When policy makers’ ability to obfuscate information is constrained, increasing public information precision can be welfare improving.

Central Bank Transparency and the Crowding Out of Private Information in Financial Markets

We use an asset market model based on Diamond (1985) to demonstrate that increased central bank transparency may lead to crowding out of costly private information, which can result in a market that is less able to predict monetary policy. Consequently, for intermediate levels of public information precision, it is optimal for the central bank to actually disclose less than it knows. We show that such crowding out can occur, even in the likely scenario that public information is more precise than private information, under the plausible assumption that traders are nearly risk neutral. Central banks should be aware of possible adverse effects of transparency and take note if market participants reduce investment in information.

Extrapolation Bias vs. Overconfidence: When Short Sale Constraints are Binding

This paper combines the market friction and traders’ behavioural biases and explicitly sets up the scenario for short sale constraints are binding. The paper contributes to the literatures by comparing the differences of extrapolation bias and overconfidence’s impacts upon asset price, market liquidity and volatility when short sale constraints are binding. The results indicate that binding short sale constraints would lead to overvaluation, the extrapolation bias’ impact upon this overvaluation is exogenous and market state-dependent: it would aggravate the overvaluation in bull market and mitigate it in bearish market, and the magnitude of the impact positively depends on the direction and extent of extrapolation bias and the proportion of the informed traders with extrapolation bias who are non-binding by short sale constraints. However, the confidence’ impact upon the overvaluation is endogenous, and the more confident informed traders enter the market or the larger degree they overestimate the received private signal would both mitigate the overvaluation. Furthermore, when short sale constraints are binding, contrary to the case that extrapolation bias does not affect market liquidity and volatility, confidence would decrease market liquidity and increase market volatility if the precision of public information is above a certain threshold.

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.