Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM
Market Power and Price Informativeness
AbstractLevels and concentration of institutional equity ownership have been growing steadily over the last few decades raising concerns of potential market instability. We study theoretically and empirically the consequences of changes in ownership structure for informational content of prices, on average and across assets with different characteristics. Our theoretical framework is a general equilibrium portfolio-choice model with endogenous information acquisition and market power. We show that, in the cross section, an increase in institutional (informed) ownership increases price informativeness, and an increase in concentration of ownership leads to lower informativeness. We confirm similar effects in the data of U.S. stocks over the period 1980-2015. The policy experiments of changing ownership structure indicate a non-monotonic relation between the levels and concentration of ownership and price informativeness. We conclude that any policy targeting ownership structure should factor in its effects on welfare through price informativeness.
Bargaining and News
AbstractWe study a bargaining model in which a buyer makes frequent offers to a privately informed seller, while gradually learning about the seller’s type from “news.” We show that the buyer’s ability to leverage this information to extract more surplus from the seller is remarkably limited. In fact, the buyer gains nothing from the ability to nego- tiate a better price despite the fact that a negotiation must take place in equilibrium. During the negotiation, the buyer engages in a form of costly “experimentation” by making offers that are sure to earn her negative payoffs if accepted, but speed up learn- ing and improve her continuation payoff if rejected. We investigate the effects of market power by comparing our results to a setting with competitive buyers. Surprisingly, both efficiency and the seller’s payoff can decrease by introducing competition among buyers.
Taking Orders and Taking Notes: Dealer Information Sharing in Treasury Markets
AbstractThe use of order flow information by financial firms has come to the forefront of the regulatory debate. A central question is: Should a dealer who acquires information by taking client orders be allowed to use or share that information? We explore how information sharing affects dealers, clients and issuer revenues in U.S. Treasury auctions. Because one cannot observe alternative information regimes, we build a model, calibrate it to auction results data, and use it to quantify counter-factuals. We estimate that yearly auction revenues with full-information sharing (with clients and between dealers) would be \$5 billion higher than in a ``Chinese Wall'' regime in which no information is shared. When information sharing enables collusion, the collusion costs revenue, but prohibiting information sharing costs more. For investors, the welfare effects of information sharing depend on how information is shared. Surprisingly, investors benefit when dealers share information with each other, not when they share more with clients. For the market, when investors can bid directly, information sharing creates a new financial accelerator: Only investors with bad news bid through intermediaries, who then share that information with others. Thus, sharing amplifies the effect of negative news. Tests of two model predictions support its key features.
University of California-San Diego
New York University
Marco Di Maggio,
Harvard Business School & NBER
- A1 - General Economics