Trade in securities markets is conducted by agents acting for principals, using "mark-to-market" contracts whereby performance is assessed using security market prices. We endogenize contract choices, information production, informed trading, and security price informativeness. But there is a contract externality. Prices are informative only because other principals induce their agents to trade based on privately produced information. The agent-traders then have an incentive to coordinate and shirk. The market price is less informative, reducing the effectiveness of mark-to-market contracts. By using managerial discretion to vary the contract type unpredictably, principals mitigate traders' coordinated manipulation and improve price informativeness. (JEL D82, D86, G12)
Gorton, Gary, Ping He, and Lixin Huang.
"Security Price Informativeness with Delegated Traders."
American Economic Journal: Microeconomics,
Asymmetric and Private Information
Economics of Contract: Theory
Asset Pricing; Trading volume; Bond Interest Rates