Speculation with Information Disclosure

Paolo Pasquariello and Yifei Wang

Sophisticated investors frequently choose to publicly disclose private information, a phenomenon inconsistent with most theories of speculation. We propose and test a model to bridge this gap. We show that when a speculator cares about both short-term portfolio value and long-term profit, a disclosure mixing asset fundamentals and her holdings is optimal by inducing competitive dealership to revise prices toward those holdings while alleviating adverse selection. We find that when mutual fund managers have stronger short-term incentives, the frequency of strategic non-anonymous disclosures about their stocks by market-worthy newspaper articles increases and those stocks’ liquidity improves, consistent with our model.