The Effect of Disclosure and Price on Uninformed Traders’ Beliefs and Trading.

• In Event: Investor Judgement and Decision Making

Abstract

We study how uniformed traders (defined as strategic traders not endowed with private information) use public disclosure and prices to form beliefs and trade. We manipulate the availability of public forecasts (e.g. earnings forecasts) of forthcoming public signals (e.g., earnings announcements). Forecasts preempt the majority of information in earnings and become redundant after earnings announcements. This unique information structure allows us to detect two interdependencies between public disclosure and prices, and their effect on uninformed traders’ beliefs. First, disclosure has an indirect positive effect on uninformed traders’ beliefs beyond its own information content due to learning from endogenous price. When earnings informativeness is high, forecasts lead to more informative prices, and uninformed traders have more accurate beliefs after earnings announcements because they glean more information from prices. Second, disclosure can hinder learning from prices. When public disclosure has low informativeness, uninformed traders overuse information in public disclosure and underuse information in prices. Such misweighting of information is more severe when forecasts are available.

Authors

• Hong Qu, Penn State University

• Guojin Gong, Penn State University

• Ian Michael Tarrant, Pennsylvania State University