Speculation with Information Disclosure

Sophisticated financial market participantsfrequently choose to disclose private information to the public — a phenomenon inconsistent with most theories of speculativetrading. In this paper, we propose and test a model to bridge this gap. We show that when a speculatorcares about both the short-term value of her portfolio and her long-term profit, information disclosure is incentive compatible: Disclosure in the form of a mixture of fundamental information and the speculator’s position induces competitive dealership to revise prices in the direction of the speculator’s position. Using mutual funddisclosure through newspaper articles, we find that when fund managers have stronger estimated ex anteshort-term incentives, the frequency of strategic disclosures about stocks in their portfolios increases and those stocks’ liquidity improves, consistent with our model.