This paper describes price discovery and liquidity provision in a dynamic limit order market with asymmetric information and non-Markovian learning. Investors condition on information in both the current limit order book and also, unlike in previous research, on the prior order history when deciding whether to provide or take liquidity. Our analysis shows that the information content of the prior order history can be substantial. Surprisingly, the information content of equilibrium orders can differ from order direction and aggressiveness. JEL classiffication: G10, G20, G24, D40. Keywords: Limit order markets, asymmetric information, liquidity, market microstructure.
{"title":"Information, Liquidity, and Dynamic Limit Order Markets","authors":"Roberto Riccò, B. Rindi, Duane J. Seppi","doi":"10.2139/ssrn.3032074","DOIUrl":"https://doi.org/10.2139/ssrn.3032074","url":null,"abstract":"This paper describes price discovery and liquidity provision in a dynamic limit order market with asymmetric information and non-Markovian learning. Investors condition on information in both the current limit order book and also, unlike in previous research, on the prior order history when deciding whether to provide or take liquidity. Our analysis shows that the information content of the prior order history can be substantial. Surprisingly, the information content of equilibrium orders can differ from order direction and aggressiveness. JEL classiffication: G10, G20, G24, D40. Keywords: Limit order markets, asymmetric information, liquidity, market microstructure.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"68 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127249135","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Fabio Moraes da Costa, Carol Liu, R. Rosa, Samuel L. Tiras
Bagnoli and Watts (2005) propose that a manager could reduce information asymmetry by choosing an income-decreasing accounting choice that signals the firm’s relatively good future prospects. A limitation in testing this theory is that most income-decreasing accounting choices over time reverse such that aggregated earnings would be the same, regardless of the choice. One income-decreasing accounting choice that never reverses is the choice of upward asset revaluation, where the resulting gains are recognized through OCI and reduce future earnings by increasing future depreciation expense. In the UK, prior to FRS15, firms had the option to upwardly revalue on a one-time basis. FRS15, and subsequently IFRS, however, require those firms that upwardly revalue precommit to revalue on a consistent basis. This precommitment sacrifices future reporting discretion, which Bagnoli and Watts (2005) suggest serves as a costly signal of a firm’s relatively good future prospects that reduces information asymmetry. The choice not to upwardly revalue, therefore, serves as a signal of a firm’s relatively poor future prospects and also reduces information asymmetry, but this choice does not require precommitment such that the reduction in information asymmetry would be less than the choice to precommit to upward revaluations. Using a propensity-score matched-pair design on a sample of UK firms to test our predictions during the period requiring precommitment, we find lower forecast dispersion, lower return volatility, and a lower cost of capital for firms that precommit to upward asset revaluations, relative to those firms that choose not to upwardly revalue their operating assets.
{"title":"The Commitment to Income-Decreasing Accounting Choices as a Credible Signal to Reduce Information Asymmetry: The Case of Asset Revaluations","authors":"Fabio Moraes da Costa, Carol Liu, R. Rosa, Samuel L. Tiras","doi":"10.2139/ssrn.3548581","DOIUrl":"https://doi.org/10.2139/ssrn.3548581","url":null,"abstract":"Bagnoli and Watts (2005) propose that a manager could reduce information asymmetry by choosing an income-decreasing accounting choice that signals the firm’s relatively good future prospects. A limitation in testing this theory is that most income-decreasing accounting choices over time reverse such that aggregated earnings would be the same, regardless of the choice. One income-decreasing accounting choice that never reverses is the choice of upward asset revaluation, where the resulting gains are recognized through OCI and reduce future earnings by increasing future depreciation expense. In the UK, prior to FRS15, firms had the option to upwardly revalue on a one-time basis. FRS15, and subsequently IFRS, however, require those firms that upwardly revalue precommit to revalue on a consistent basis. This precommitment sacrifices future reporting discretion, which Bagnoli and Watts (2005) suggest serves as a costly signal of a firm’s relatively good future prospects that reduces information asymmetry. The choice not to upwardly revalue, therefore, serves as a signal of a firm’s relatively poor future prospects and also reduces information asymmetry, but this choice does not require precommitment such that the reduction in information asymmetry would be less than the choice to precommit to upward revaluations. Using a propensity-score matched-pair design on a sample of UK firms to test our predictions during the period requiring precommitment, we find lower forecast dispersion, lower return volatility, and a lower cost of capital for firms that precommit to upward asset revaluations, relative to those firms that choose not to upwardly revalue their operating assets.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"141 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116277480","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using the market for initial coin offerings (ICOs) as a laboratory, we provide evidence that entrepreneurs use retention to alleviate information asymmetry. The underlying technology and the absence of regulation make the ICO market well suited to study this question empirically. Using a hand-collected data set, we show that ICO issuers that retain a larger fraction of their tokens are more successful in their funding efforts and are more likely to develop a working product. Moreover, we find that retention is a stronger signal when markets are crowded, and investors do not have as much time to conduct due diligence. This paper was accepted by Will Cong, Special Issue of Management Science: Blockchains and crypto economics. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.4631 .
{"title":"De-crypto-ing Signals in Initial Coin Offerings: Evidence of Rational Token Retention","authors":"T. Davydiuk, Deeksha Gupta, Samuel Rosen","doi":"10.2139/ssrn.3286835","DOIUrl":"https://doi.org/10.2139/ssrn.3286835","url":null,"abstract":"Using the market for initial coin offerings (ICOs) as a laboratory, we provide evidence that entrepreneurs use retention to alleviate information asymmetry. The underlying technology and the absence of regulation make the ICO market well suited to study this question empirically. Using a hand-collected data set, we show that ICO issuers that retain a larger fraction of their tokens are more successful in their funding efforts and are more likely to develop a working product. Moreover, we find that retention is a stronger signal when markets are crowded, and investors do not have as much time to conduct due diligence. This paper was accepted by Will Cong, Special Issue of Management Science: Blockchains and crypto economics. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.4631 .","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134551398","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A principal seeks to persuade an agent to accept an offer of uncertain value before a deadline expires. The principal can generate information, but exerts no control over exogenous outside information. The combined effect of the deadline and outside information creates incentives for the principal to keep uncertainty high in the first periods so as to persuade the agent close to the deadline. We characterize the equilibrium, compare it to the single-player decision problem in which exogenous outside information is the agent’s only source of information, and examine the welfare implications of our analysis. (JEL C73, D82, D83)
{"title":"Dynamic Persuasion With Outside Information","authors":"Jacopo Bizzotto, Jesper Rüdiger, A. Vigier","doi":"10.2139/ssrn.3154313","DOIUrl":"https://doi.org/10.2139/ssrn.3154313","url":null,"abstract":"A principal seeks to persuade an agent to accept an offer of uncertain value before a deadline expires. The principal can generate information, but exerts no control over exogenous outside information. The combined effect of the deadline and outside information creates incentives for the principal to keep uncertainty high in the first periods so as to persuade the agent close to the deadline. We characterize the equilibrium, compare it to the single-player decision problem in which exogenous outside information is the agent’s only source of information, and examine the welfare implications of our analysis. (JEL C73, D82, D83)","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"47 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126289001","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In procurement auctions, bidders are usually better informed about technical, financial, or legal aspects of the goods and services procured. Therefore, the buyer may include a dialogue in the procurement procedure which enables the suppliers to reveal information that will help the buyer to better specify the terms of the contract. This paper addresses the question of the value added of letting the sourcing process consist of both an auction and a negotiation stage, theoretically and in a laboratory experiment. Our theoretical results suggest that in a setting where the buyer and the suppliers have aligned interests regarding the terms of the contract, allowing the winning supplier to communicate with the buyer after the auction is beneficial to the buyer compared to no communication and ex-ante communication. In a setting where the buyer and the winning supplier have misaligned interests regarding the terms, the buyer benefits from ex-ante communication relative to no communication and ex-post communication. Our experimental data provide strong evidence for the predictions in the aligned-interest setting. In the misaligned-interest setting, we do not observe significant differences between the three mechanisms. Our experimental findings offer several managerial implications for the appropriate design of sourcing processes.
{"title":"Cheap-talk Communication in Procurement Auctions: Theory and Experiment","authors":"S. Onderstal, Yang Yang","doi":"10.2139/ssrn.3542737","DOIUrl":"https://doi.org/10.2139/ssrn.3542737","url":null,"abstract":"In procurement auctions, bidders are usually better informed about technical, financial, or legal aspects of the goods and services procured. Therefore, the buyer may include a dialogue in the procurement procedure which enables the suppliers to reveal information that will help the buyer to better specify the terms of the contract. This paper addresses the question of the value added of letting the sourcing process consist of both an auction and a negotiation stage, theoretically and in a laboratory experiment. Our theoretical results suggest that in a setting where the buyer and the suppliers have aligned interests regarding the terms of the contract, allowing the winning supplier to communicate with the buyer after the auction is beneficial to the buyer compared to no communication and ex-ante communication. In a setting where the buyer and the winning supplier have misaligned interests regarding the terms, the buyer benefits from ex-ante communication relative to no communication and ex-post communication. Our experimental data provide strong evidence for the predictions in the aligned-interest setting. In the misaligned-interest setting, we do not observe significant differences between the three mechanisms. Our experimental findings offer several managerial implications for the appropriate design of sourcing processes.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129482695","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Yingshan Chen, M. Dai, Luis Goncalves-Pinto, Jing Xu, Cheng Yan
We examine the problem of an investor who trades in a market with unobservable regime shifts. The investor learns from past prices and is subject to transaction costs. Our model generates significantly larger liquidity premia compared with a benchmark model with observable market shifts. The larger premia are driven primarily by suboptimal risk exposure, as turnover is lower under incomplete information. In contrast, the benchmark model produces (mechanically) high turnover and heavy trading costs. We provide empirical support for the amplification effect of incomplete information on the relation between trading costs and future stock returns. We also show empirically that such amplification is not driven by turnover. Overall, our results can help explain the large disconnect between theory and evidence regarding the magnitude of liquidity premia, which has been a longstanding puzzle in the literature. This paper was accepted by Kay Giesecke, finance.
{"title":"Incomplete Information and the Liquidity Premium Puzzle","authors":"Yingshan Chen, M. Dai, Luis Goncalves-Pinto, Jing Xu, Cheng Yan","doi":"10.2139/ssrn.3288878","DOIUrl":"https://doi.org/10.2139/ssrn.3288878","url":null,"abstract":"We examine the problem of an investor who trades in a market with unobservable regime shifts. The investor learns from past prices and is subject to transaction costs. Our model generates significantly larger liquidity premia compared with a benchmark model with observable market shifts. The larger premia are driven primarily by suboptimal risk exposure, as turnover is lower under incomplete information. In contrast, the benchmark model produces (mechanically) high turnover and heavy trading costs. We provide empirical support for the amplification effect of incomplete information on the relation between trading costs and future stock returns. We also show empirically that such amplification is not driven by turnover. Overall, our results can help explain the large disconnect between theory and evidence regarding the magnitude of liquidity premia, which has been a longstanding puzzle in the literature. This paper was accepted by Kay Giesecke, finance.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"55 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122443093","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study considers a mechanism design problem in which service slots are allocated over time to buyers arriving at different periods. Some buyers can accept delayed service, whereas others cannot. Buyers have a multidimensional type representing their valuation and patience level. The seller fully commits to a mechanism with or without complete contingent contracts. We show that a deterministic mechanism is periodic ex-post incentive compatible if and only if the allocation rule is monotone in valuation and the "price equivalence" holds. In cases both with and without contingent contracts, the dynamic pivot mechanism with a reserve price maximizes the seller's expected revenue under a regularity condition, which is characterized by the linearity of the virtual valuation function. When the regularity holds, the fully optimal mechanism with contingent contracts is multi-contracting-proof, whereas the constrained optimal mechanism without contingent contracts is not.
{"title":"Dynamic Slot Allocations with Different Patience Levels","authors":"Ryuji Sano","doi":"10.2139/ssrn.3532870","DOIUrl":"https://doi.org/10.2139/ssrn.3532870","url":null,"abstract":"This study considers a mechanism design problem in which service slots are allocated over time to buyers arriving at different periods. Some buyers can accept delayed service, whereas others cannot. Buyers have a multidimensional type representing their valuation and patience level. The seller fully commits to a mechanism with or without complete contingent contracts. We show that a deterministic mechanism is periodic ex-post incentive compatible if and only if the allocation rule is monotone in valuation and the \"price equivalence\" holds. In cases both with and without contingent contracts, the dynamic pivot mechanism with a reserve price maximizes the seller's expected revenue under a regularity condition, which is characterized by the linearity of the virtual valuation function. When the regularity holds, the fully optimal mechanism with contingent contracts is multi-contracting-proof, whereas the constrained optimal mechanism without contingent contracts is not.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"26 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116430166","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A key feature of communication with evidence is skepticism: to the extent possible, a receiver will attribute any incomplete disclosure to the sender concealing unfavorable evidence. The degree of skepticism depends on how much evidence the sender is expected to possess. I characterize when a change in the prior distribution of evidence induces more skepticism, i.e. induces any receiver to take an equilibrium action that is less favorable to the sender following every message. I formalize an increase in the sender’s (ex-ante) amount of evidence and show that this is equivalent to inducing more skepticism. As an input to this result, I fully characterize receiver optimal equilibrium outcomes in general verifiable disclosure games. I apply these results to a dynamic disclosure problem in which the sender obtains and discloses evidence over time. I identify the necessary and sufficient condition on the evidence structure such that the receiver cannot benefit from early inspections.
{"title":"Evidence and Skepticism in Verifiable Disclosure Games","authors":"Daniel A. Rappoport","doi":"10.2139/ssrn.2978288","DOIUrl":"https://doi.org/10.2139/ssrn.2978288","url":null,"abstract":"A key feature of communication with evidence is skepticism: to the extent possible, a receiver will attribute any incomplete disclosure to the sender concealing unfavorable evidence. The degree of skepticism depends on how much evidence the sender is expected to possess. I characterize when a change in the prior distribution of evidence induces more skepticism, i.e. induces any receiver to take an equilibrium action that is less favorable to the sender following every message. I formalize an increase in the sender’s (ex-ante) amount of evidence and show that this is equivalent to inducing more skepticism. As an input to this result, I fully characterize receiver optimal equilibrium outcomes in general verifiable disclosure games. I apply these results to a dynamic disclosure problem in which the sender obtains and discloses evidence over time. I identify the necessary and sufficient condition on the evidence structure such that the receiver cannot benefit from early inspections.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116115315","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the design of trade policies in an uncertain third market with incomplete information. Governments in each of the two countries select either direct quantity controls or subsidies in an attempt to shift profits in favour of their own firms in an oligopolistic setting. It is shown that the country with firms having information disadvantage tends to choose the direct quantity control, while the country with well-informed firms would use export subsidy (export quota) when the degree of uncertainty is sufficiently high (low).
{"title":"Choice of Trade Policy for International Oligopoly with Incomplete Information","authors":"Haokai Ning","doi":"10.2139/ssrn.3642751","DOIUrl":"https://doi.org/10.2139/ssrn.3642751","url":null,"abstract":"This paper studies the design of trade policies in an uncertain third market with incomplete information. Governments in each of the two countries select either direct quantity controls or subsidies in an attempt to shift profits in favour of their own firms in an oligopolistic setting. It is shown that the country with firms having information disadvantage tends to choose the direct quantity control, while the country with well-informed firms would use export subsidy (export quota) when the degree of uncertainty is sufficiently high (low).","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"07 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128983158","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a data-sales model to study the implications of alternative data for financial markets. Investors acquire skills to process the purchased raw data, and developing such skills is costly and involves considerable uncertainty. The data vendor controls the size of the data sample to influence the precision of the information investors can extract from the purchased data. Price informativeness is hump-shaped in skill-acquisition costs although the cost of capital and return volatility are U-shaped in skill-acquisition costs. Similar patterns can arise for skill mean and volatility. Our analysis suggests that the funds and data industries foster each other. This paper was accepted by Agostino Capponi, finance.
{"title":"Skill Acquisition and Data Sales","authors":"Shiyang Huang, Y. Xiong, Liyan Yang","doi":"10.2139/ssrn.2870190","DOIUrl":"https://doi.org/10.2139/ssrn.2870190","url":null,"abstract":"We develop a data-sales model to study the implications of alternative data for financial markets. Investors acquire skills to process the purchased raw data, and developing such skills is costly and involves considerable uncertainty. The data vendor controls the size of the data sample to influence the precision of the information investors can extract from the purchased data. Price informativeness is hump-shaped in skill-acquisition costs although the cost of capital and return volatility are U-shaped in skill-acquisition costs. Similar patterns can arise for skill mean and volatility. Our analysis suggests that the funds and data industries foster each other. This paper was accepted by Agostino Capponi, finance.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126696820","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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