Providers of financial information have an economic incentive to delay its disclosure for strategic business reasons, according to a Yeshiva University analysis published in the Journal of Financial Economics.
The paper, “Information Arrival, Delay, and Clustering in Financial Markets with Dynamic Freeriding,” co-authored by Dr. Tadashi Hashimoto, an assistant professor in the Quantitative Economics program at the Katz School of Science and Health, and Dr. Cyrus Aghamolla of the Carlson School of Management, University of Minnesota, asserts that by delaying the disclosure of information, economic agents can collect additional information and obtain insights from the actions of other industry players to enhance their competitive advantage.
“We have developed a mathematical model of information delay and undersupply,” said Dr. Hashimoto, “and applied this abstract framework to the analysis of a wide range of economic and financial applications.”
These economic agents are private firms in new industries that can delay an initial public offering and devote fewer resources to assessing their valuation in order to benefit from the evaluative research of firms that have recently gone public. Securities analysts and macroeconomic forecasters can improve their accuracy by delaying the timing of their forecasts and observing the reports of other analysts.
Hedge funds and mutual funds can learn the industry research of other institutional investors through their mandatory portfolio disclosures. Companies can observe the implementation and performance of new technology by their peers before adopting it themselves. For example, American steelmakers needed two decades to adopt the basic oxygen furnace after its introduction to the United States in 1954.
“In all of these examples economic agents have an incentive to expend less effort in voluntarily collecting information and to delay their actions,” said Dr. Hashimoto, “but there is no guarantee that their strategic decisions on information acquisition or the timing of information release are close enough to being socially optimal. Decision-makers in financial or other markets could be totally misled when they’re not informed in a timely manner.”
The study’s main results show that in large populations, few economic agents provide significant information while the vast majority of agents, most of them in capital markets, engage in free-riding, which is a benefit obtained at another’s expense or without the usual cost or effort.
“This research is, simply put, about the natural tendency to hesitate in starting something new,” he said. “Many people naturally want to avoid becoming the first mover. After seeing other people’s reactions, you can do more sophisticated things.”
Dr. Hashimoto and Dr. Aghamolla’s model demonstrates how economic agents—information suppliers—acquire and, perhaps unwillingly, provide information to peers, competitors and the public in light of free-riding incentives.
“Our setting is one where agents first simultaneously engage in costly information acquisition,” said Dr. Hashimoto. “Agents then choose the timing of their action while potentially learning from the actions of earlier agents. We allow for more than two agents so that we can analyze how early moves affect subsequent decisions.”
These results, he said, highlight the significant role of opinion leaders in the formation of public opinion. The study suggests that only a fraction of opinion leaders determine the bulk of public information. The others tend to have a very limited impact on the development of public opinion already well established by vocal opinion leaders.
“This study provides a theory that captures both the sources of information provision and the dynamics of its arrival,” said Dr. Hashimoto, “which contributes to our understanding of the process of opinion formation and asset pricing in financial and other markets.”
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