4.5 Article

Dynamics of Research and Strategic Trading

Journal

REVIEW OF FINANCIAL STUDIES
Volume 35, Issue 2, Pages 908-961

Publisher

OXFORD UNIV PRESS INC
DOI: 10.1093/rfs/hhab029

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This study explores how dynamic research impacts information acquisition in financial markets. More frequent public disclosures may enhance private information acquisition but harm liquidity. Observed research activity does not necessarily indicate better market information acquisition.
We study how dynamic research affects information acquisition in financial markets. In our strategic trading model, the trader performs costly research to generate private information but does not always succeed. Optimal research activity responds to market conditions and generates novel implications. First, more frequent public disclosures can crowd in private information acquisition, increase price informativeness, and harm liquidity, instead of leveling the playing field. Second, observed research activity does not necessarily imply that traders are better informed. Finally, improvements in research effectiveness or higher market participation by uninformed investors can simultaneously increase price informativeness and liquidity.

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