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Information disclosure with leakages

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  • Grégoire, Philippe
  • Huang, Hui

Abstract

We present a trading game with one insider, many outsiders, liquidity traders and a competitive market maker trading an asset with two value components, a private and a shared one, in a market operating as in Kyle (1985). The insider knows both value components and outsiders only know the shared component. The market maker receives a private signal in the form of a noisy transformation of the shared component, which we refer to as leakages. Before trade begins, the insider can disclose the value of the shared component to the entire market, thus removing the outsiders from the game. When the market maker's signal is sufficiently precise, the insider's benefit from knowing the shared component does not exceed the cost of concurrently trading with the outsiders, thus motivating the insider to reveal the shared component to the entire market. This result provides an explanation as to why some firm managers may naturally prefer to publicly disclose information rather than leaving it in the hands of select investors.

Suggested Citation

  • Grégoire, Philippe & Huang, Hui, 2012. "Information disclosure with leakages," Economic Modelling, Elsevier, vol. 29(5), pages 2005-2010.
    • Handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:2005-2010
    DOI: 10.1016/j.econmod.2012.04.023
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    References listed on IDEAS

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    Cited by:

    1. Chu, Chien Chi & Chang, Chiao Yi & Zhou, Rui Jie, 2021. "The nonlinear connection between 52-week high and announcement effect of insider trading — Evidence from mainland China and Taiwan," Economic Modelling, Elsevier, vol. 94(C), pages 1043-1057.
    2. Li, Ningwei & Li, Zhihua & Liu, Hong & Yang, Qingshan, 2024. "Strategic information leakage with market supervision," The North American Journal of Economics and Finance, Elsevier, vol. 73(C).
    3. Liu, Xia & Huang, Wenli & Liu, Bo & Zhang, Xiaohong, 2019. "Strategic leakage of private information," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 637-644.
    4. Lyudmila A. Glik & Oleg L. Kritski, 2014. "Finding informed traders in futures and their inderlying assets in intraday trading," Papers 1402.6583, arXiv.org.
    5. Wang, Kun Tracy & Wang, Wanbin Walter, 2017. "Competition in the stock market with asymmetric information," Economic Modelling, Elsevier, vol. 61(C), pages 40-49.

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    More about this item

    Keywords

    Insider trading; Information; Disclosure;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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