Information Production and Market Feedback
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Topic: |
Information Production and Market Feedback |
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Time&Date: |
9:30-10:45 am, 2020/4/17 (Friday) |
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Venue: |
Zoom Meeting ID: 797-219-7353 |
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Speaker: |
Prof. Liyan Yang (University of Toronto) |
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Abstract: |
We analyze information production by a firm manager and traders in financial markets, when the manager conditions her investment decision on information revealed through stock prices and the firm is exposed to multiple sources of uncertainty. We highlight the delicate strategic interaction between the manager and traders with regards to their incentives to produce information. For low NPV projects, there is a fundamental mismatch: while traders want to collect the same information as the manager to maximize trading profits, the manager optimally diversifies her information sources and tries to acquire orthogonal information. We show that in this case, the extent of information overlap is high. For high NPV projects, the agents’ incentives are aligned and information overlap is low. We connect the information choices to market efficiency and real efficiency and highlight an inherent discrepancy. Perhaps surprisingly, we show that the firm can be better off hiring a biased manager who misjudges her skill to acquire information. |
