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The Effects of Public Information with Asymmetrically Informed Short‐Horizon Investors
Author(s) -
CHEN QI,
HUANG ZEQIONG,
ZHANG YUN
Publication year - 2014
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.12052
Subject(s) - private information retrieval , public information , information asymmetry , uniqueness , economics , microeconomics , competition (biology) , price discovery , monetary economics , price formation , econometrics , financial economics , computer science , mathematics , statistics , mathematical analysis , ecology , internet privacy , biology , futures contract
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 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.