This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

« Back to Results

The Use (and Misuse) of Private Information in Financial Markets

Paper Session

Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)

Manchester Grand Hyatt, Seaport H
Hosted By: American Finance Association
  • Chair: Snehal Banerjee, University of California-San Diego

Skill Acquisition and Data Sales

Shiyang Huang
,
University of Hong Kong
Yan Xiong
,
Hong Kong University of Science and Technology
Liyan Yang
,
University of Toronto

Abstract

We analyze a data-sales model in which investors acquire uncertain skills to interpret purchased data, thereby changing the data seller's behavior. When the seller owns accurate data, she optimally adds noise to the sold data to dampen information leakage via asset prices. If skill acquisition of investors is uncertain, the seller cannot fully control this information leakage. As a result, price informativeness can increase with skill-acquisition costs and decrease with the average level of investor skills. Our analysis helps explain some empirical regularities and highlights fundamental interactions between the asset management industry and the data industry.

Dynamic Coordination with Flexible Security Design

Emre Ozdenoren
,
London Business School
Kathy Yuan
,
London School of Economics
Shengxing Zhang
,
London School of Economics

Abstract

Borrowers obtain funding for production by issuing securities backed by the current-period dividend and resale price of a long-lived collateral asset. Borrowers are privately informed about collateral quality. A higher (lower) resale price lowers (increases) adverse selection and makes the asset a good (lousy) collateral. Conversely, good (lousy) collateral has a high (low) resale price. When only equity is issued, this dynamic feedback between the asset price and collateral quality can lead to multiple equilibria. Optimal flexible security design eliminates multiple equilibria fragility and improves welfare through intertemporal coordination. When the security design is rigid, multiple equilibria reemerge.

Becker Meets Kyle: Inside Insider Trading

Marcin Kacperczyk
,
Imperial College London
Emiliano Pagnotta
,
Imperial College London

Abstract

How do illegal insiders trade on private information? Do they internalize legal risk? Using hand-collected data on insiders prosecuted by the SEC, we find that, consistent with Kyle (1985), insiders manage trade size and timing according to market conditions and the value of information. Gender, age, and profession play a lesser role. Various shocks to penalties and likelihood of prosecution show that insiders internalize legal risk by moderating aggressiveness, providing support to regulators’ deterrence ability. Consistent with Becker (1968), following positive shocks to expected penalties, insiders concentrate on fewer signals of higher value. Thus, enforcement actions could hamper price informativeness.
Discussant(s)
Nadya Malenko
,
Boston College
Jesse Davis
,
University of North Carolina-Chapel Hill
Kenneth Ahern
,
University of Southern California
JEL Classifications
  • G1 - General Financial Markets