Review of Financial Studies Vol. 35 No. 7 2022
Markets versus Mechanisms
Abstract
We establish limitations to the usage of direct revelation mechanisms (DRMs) by corporations seeking decision-relevant information in economies with securities markets. In this environment, posting a DRM increases the informed agent’s outside option: if the agent rejects the DRM, he convinces the market he is uninformed, and he can aggressively trade with low price impact, thereby generating large (off-equilibrium) trading gains. This endogenous outside option may make using a DRM to screen uninformed agents impossible. When screening is possible, solely relying on the market for information is optimal if the increase in outside option is sufficiently large.
- DOI
- 10.1093/rfs/hhab131
- Volume
- 35
- Issue
- 7
- Pages
- 3139-3174
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref