Rational Opacity

We present an environment in which long-term investors sometimes choose to restrict how much fundamental information they receive about the value of their investment to preserve its liquidity in secondary markets. When and only when there is a risk that secondary markets may be shallow, more informa...

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Bibliographic Details
Published in:The Review of financial studies 2017-12, Vol.30 (12), p.4317-4348
Main Authors: Monnet, Cyril, Quintin, Erwan
Format: Article
Language:English
Subjects:
Liquidity
Markets
Portfolio investments
Risk reduction
Secondary markets
Studies
Transparency
Welfare
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Summary:We present an environment in which long-term investors sometimes choose to restrict how much fundamental information they receive about the value of their investment to preserve its liquidity in secondary markets. When and only when there is a risk that secondary markets may be shallow, more information can reduce the expected payoff of agents who need to cash out early. Even given direct and costless control over information design, stakeholders choose to incentivize managers to withhold interim information. In such an environment, imposing transparency can lower investment and welfare.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhx034