publication . Article . 2010

Security Price Informativeness with Delegated Traders

Gary B. Gorton; Ping He; Lixin Huang;
Open Access
  • Published: 01 Jan 2010 Journal: SSRN Electronic Journal (eissn: 1556-5068, Copyright policy)
  • Publisher: Elsevier BV
Abstract
<jats:p> Trade in securities markets is conducted by agents acting for principals, using “mark-to-market” contracts whereby performance is assessed using security market prices. We endogenize contract choices, information production, informed trading, and security price informativeness. But there is a contract externality. Prices are informative only because other principals induce their agents to trade based on privately produced information. The agent-traders then have an incentive to coordinate and shirk. The market price is less informative, reducing the effectiveness of mark-to-market contracts. By using managerial discretion to vary the contract type unpre...
Subjects
free text keywords: General Economics, Econometrics and Finance, Externality, Contract type, Principal–agent problem, Economics, Market price, Mark-to-market accounting, Microeconomics, Incentive, Security market, Security price, jel:D82, jel:D86, jel:G12
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