Markets versus Mechanisms
Journal
Review of Financial Studies
Subject
Finance
Publishing details
Authors / Editors
Boleslavsky R;Hennessy C A;Kelly D L
Biographies
Publication Year
2022
Abstract
We establish limitations to the usage of direct revelation mechanisms (DRMs) by corporations seeking decision-relevant information in economies with securities markets. In this environment, posting a DRM increases the informed agent’s outside option: if the agent rejects the DRM, he convinces the market he is uninformed, and he can aggressively trade with low price impact, thereby generating large (off-equilibrium) trading gains. This endogenous outside option may make using a DRM to screen uninformed agents impossible. When screening is possible, solely relying on the market for information is optimal if the increase in outside option is sufficiently large.
Available on ECCH
No
