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Security Price Informativeness with Delegated Traders

Security Price Informativeness with Delegated Traders Abstract 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 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Microeconomics American Economic Association

Security Price Informativeness with Delegated Traders

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Publisher
American Economic Association
Copyright
Copyright © 2010 by the American Economic Association
Subject
Articles
ISSN
1945-7685
eISSN
1945-7685
DOI
10.1257/mic.2.4.137
Publisher site
See Article on Publisher Site

Abstract

Abstract 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 )

Journal

American Economic Journal: MicroeconomicsAmerican Economic Association

Published: Nov 1, 2010

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