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

Chen, Qi; Huang, Zeqiong; Zhang, Yun

doi:10.2139/ssrn.1944328

“…Assuming exogenous information, prior literature primarily focuses on the insight from Morris and Shin (2002) that beauty contest incentives lead agents to put greater weight on information that is more public in nature. This effect underlies the findings in Gao (2008) and Chen et al (2014) in the context of short-horizon trading, Arya and Mittendorf (2016) and Chen et al (2017) in the context of investment complementarities, and Anctil et al (2004), Banerjee and Maier (2016), Qu (2013), and Liang and Zhang (2014) in the context of bank runs. We are the first to introduce the insight of Myatt and Wallace (2012) with endogenous information acquisition.…”

Section: Introductionsupporting

confidence: 62%

Clarity Trumps Content: An Experiment on Information Acquisition in Beauty Contests

Banerjee

¹

,

Qu

²

,

Zhao

³

2019

SSRN Journal

1

0

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We provide experimental evidence that under strong beauty contest incentives, players ignore signals from an information source with high content if the source has low clarity. Instead, they acquire equally costly signals from a source with higher clarity despite its lower content. Content measures how precisely an information source identifies an economic situation, whereas clarity measures how precisely the source content is commonly interpreted. Low clarity impairs players' ability to coordinate. When signals are provided exogenously, our experimental results are less severe than theoretical predictions, but consistent with level-2 reasoning in a cognitive behavioral model. When players acquire signals endogenously, ignoring a high-content source is more severe than theoretical predictions. Our results imply that when beauty contest incentives are strong (e.g., short-horizon trading), investors can completely ignore a firm's disclosure, despite its high content, if the disclosure is not sufficiently clear.

show abstract

“…Assuming exogenous information, prior literature primarily focuses on the insight from Morris and Shin (2002) that beauty contest incentives lead agents to put greater weight on information that is more public in nature. This effect underlies the findings in Gao (2008) and Chen et al (2014) in the context of short-horizon trading, Arya and Mittendorf (2016) and Chen et al (2017) in the context of investment complementarities, and Anctil et al (2004), Banerjee and Maier (2016), Qu (2013), and Liang and Zhang (2014) in the context of bank runs. We are the first to introduce the insight of Myatt and Wallace (2012) with endogenous information acquisition.…”

Section: Introductionsupporting

confidence: 62%

Clarity Trumps Content: An Experiment on Information Acquisition in Beauty Contests

Qu

¹

,

Banerjee

²

,

Zhao

³

2018

SSRN Journal

0

View full text Add to dashboard Cite

We provide experimental evidence that under strong beauty contest incentives, players ignore signals from an information source with high content if the source has low clarity. Instead, they acquire equally costly signals from a source with higher clarity despite its lower content. Content measures how precisely an information source identifies an economic situation, whereas clarity measures how precisely the source content is commonly interpreted. Low clarity impairs players' ability to coordinate. When signals are provided exogenously, our experimental results are less severe than theoretical predictions, but consistent with level-2 reasoning in a cognitive behavioral model. When players acquire signals endogenously, ignoring a high-content source is more severe than theoretical predictions. Our results imply that when beauty contest incentives are strong (e.g., short-horizon trading), investors can completely ignore a firm's disclosure, despite its high content, if the disclosure is not sufficiently clear.

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“…They find that the type of disagreement affects whether it increases or decreases cost of capital. Chen et al (2014) find that the liquidation price uncertainty that investors face causes them to trade less aggressively. However, this effect is not proportionate to the precision of their private information; investors with more precise information scale back their trades more.…”

mentioning

confidence: 97%

“…While our paper focuses on the relation between information, liquidity, and cost of capital by relaxing the assumption of perfection competition among investors in markets, another strand of literature explores these relations in models where investors have different time horizons. For example, Bloomfield and Fischer (2011) and Chen, Huang, and Zhang (2014) analyze cost of capital in overlapping generations' models. First generation investors must liquidate their shares early; they cannot hold shares until the firm's ultimate cash flows occur.…”

mentioning

confidence: 99%