Wednesday, March 18, 2009

SSRN-Fair Disclosure and Investor Asymmetric Awareness in Stock Markets by Zhen Liu

This one needs to be sold just a little, but then is a really cool insight. It deals with Reg FD. The "if I tell anyone, I have to tell everyone" rule.

But first imagine you are a student in a class that is reviewing for a test. You are aware of a great way to ask a question for the test, but are a bit unclear about it. However, you know you are ahead of the rest of the class on the topic and doubt the rest of the class has even considered it (so in effect you asking the teacher would be also 'tipping them off'). What do you do?
A. Ask the teacher and while gaining total information, lose some of your competitive advantage.
B. Sit there quietly so as not to tip off the rest of the class and then research it more on your own.

If you chose B, you will totally understand this next paper!

SSRN-Fair Disclosure and Investor Asymmetric Awareness in Stock Markets by Zhen Liu:
"The U.S. Security and Exchange Commission implemented Regulation Fair Disclosure in 2000. The regulator aims to reduce information asymmetry among investors, and expects public forums to subsume the forbidden information channel of selective forums....when a participant is aware of more uncertainties than are other participants, with zero incentives to share the insights, he would search information privately rather than raising questions in public forums. This causes inefficient information production compared to 'unfair'' selective disclosure.
More from the introduction:
"At first glance, fair disclosure seems the best remedy for the information asymmetry caused by selective disclosure, without sacrificing the availability of high quality information. However, practitioners have argued that the regulation has produced some undesirable side eeffects: 1. The ambiguous definition of material information makes issuers reluctant to provide "immaterial" information in private . 2. Professionals may be unable to obtain information because of ineffective technology utilized in public communications. 3. Professionals 'with the most perception, intuition, or experience are not willing to share their insights with other investors under fair disclosure, so that less information can be revealed."
One more look in:
"Compared with small investors, financial professionals have significantly more resources and incentives to acquire both information and awareness. Our first major assumption is that small investors are unaware of some relevant uncertainties that professionals are aware of, and professionals know it. This is widely observed and empirically supported by the literature on small investors' behavior.

The other major assumption is that at public forums, when professionals ask critical
questions, small investors are able to know as much as professionals know. The potential free rider problem certainly reduces the incentives of professionals to ask critical questions."

Definitely a good insight and one I never considered before.

Liu, Zhen,Fair Disclosure and Investor Asymmetric Awareness in Stock Markets(March 12, 2009). Available at SSRN:

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