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EDGAR on the internet: The welfare effects of wider information distribution in an experimental market for risky assets

Published online by Cambridge University Press:  14 March 2025

David Bodoff ,
Hugo Levecq  and
Hongtao Zhang
David Bodoff*
Affiliation:
University of Haifa
Hugo Levecq*
Affiliation:
Department of Finance, Reims Management School
Hongtao Zhang*
Affiliation:
Department of Information and Systems Management, The Hong Kong University of Science and Technology
*
e-mail: [email protected]
e-mail: [email protected]
e-mail: [email protected]
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Abstract

Policies such as the SEC's Fair Disclosure Rule, and technologies such as SEC EDGAR, aim to disseminate corporate disclosures to a wider audience of investors in risky assets. In this study, we adopt an experimental approach to measure whether this wider disclosure is beneficial to these investors. Price-clearing equilibrium models based on utility maximization and non-revealing and fully-revealing prices predict that in a pure exchange economy, an arbitrary trader would prefer that no investors are informed rather than all are informed; non-revealing theory further predicts that an arbitrary trader would prefer a situation in which all traders are informed rather than half the traders are informed. These predictions can be summarized as “None > All > Half”. A laboratory study was conducted to test these predictions. Where previous studies have largely focused on information dissemination and its effects on equilibrium price and insider profits, we focus instead on traders’ expected utility, as measured by their preferences for markets in which none, half, or all traders are informed. Our experimental result contradicts the prediction and indicates “Half > None > All”, i.e. subjects favor a situation where a random half is informed. The implication is that in addition to testing predictions of price equilibrium, experiments should also be used to verify analytical welfare predictions of expected utility under different policy choices.

Keywords

Asymmetric and private informationFinancial marketsInformation and market efficiencyInformation and internet services

JEL classification

D53: Financial Markets G14: Information and Market Efficiency • Event Studies • Insider Trading L86: Information and Internet Services • Computer Software D82: Asymmetric and Private Information • Mechanism Design
Type
Research Article
Information
Experimental Economics , Volume 9 , Issue 4 , December 2006 , pp. 361 - 381
Copyright
Copyright © 2006 Economic Science Association

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Footnotes

*

This work was largely completed while this author was at The Hong Kong University of Science and Technology.

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