The Effects of Public Information with Asymmetrically Informed Short-Horizon Investors
Accepted by Haresh Sapra. We appreciate the constructive comments from an anonymous referee. We benefit from discussions with Hengjie Ai, Jeremy Bertomeu, Alexander Bleck, Philip Bond, Doug Diamond, Pingyang Gao, Raffi Indjejikian, Brian Mittendorf, Katherine Schipper, Vish Viswanathan, and Jiang Wang. We thank workshop participants at Carnegie Mellon University, Duke University, Ohio State University, Purdue University, Shanghai Advanced Institute of Finance, Shanghai University of Finance and Economics, Stanford University, the Washington Area Accounting Conference, University of Chicago, University of Michigan, University of Minnesota, University of Pennsylvania Wharton School, and Xiamen University. The authors acknowledge the financial support from their respective institutions. Chen also acknowledges the support from Tsinghua University, where part of the research was conducted during his visit there.
This paper analyzes the effects of public information in a perfect competition trading model populated by asymmetrically informed short-horizon investors with different levels of private information precision. We first show that information asymmetry reduces the amount of private information revealed by price in equilibrium (i.e., price informativeness) and can lead to multiple linear equilibria. We then demonstrate that the presence of both information asymmetry and short horizons provides a channel through which public information influences price informativeness and equilibrium uniqueness. We identify conditions under which public information increases or decreases price informativeness, and when multiple equilibria may arise. Our analysis shows that public information not only directly endows prices with more (public) information, it can also have an important indirect effect on the degree to which prices reveal private information.