abstract

Add a stage of signal acquisition to a canonical model of portfolio choice. Under fully revealing asset price, investors' information demand reflects their choice of transparency. In reducing uncertainty, financial transparency raises expected asset price and thus benefits holders of the risky asset. At a natural transparency limit, however, investors pay to inhibit further disclosure in order to forestall the erosion of the asset's expected excess return. The natural transparency limit varies with the portfolio position. There is a dominant investor with a risky asset endowment modestly above market average who single-handedly determines transparency in equilibrium. The dominant investor strictly improves welfare for investors with similar endowments but strictly reduces welfare for others when acquiring signals beyond their natural transparency limits. The welfare consequences of financial transparency are thus intricately linked to the wealth distribution.

keywords: Information acquisition; financial transparency; rational expectations equilibrium; fully revealing asset price; disclosure; gamma distributed asset returns; Poisson distributed signals

jel: G14, D81, D84

background

• cesifo working paper [1436] version
• prior version: Rational information choice in financial market equilibrium [pdf 396k]
  (encompassing two manuscripts now circulated independently, entitled Risk neutral investors do not acquire information and The action value of information and the natural transparency limit)