Market Microstructure

Brunnermeier, Markus K. “Information Leakage and Market Efficiency”. Review of Financial Studies 18 (2005): , 18, 417-457. Print.Abstract

This article analyzes the effects of information leakage on trading behavior and market efficiency. A trader who receives a noisy signal about a forthcoming public announcement can exploit it twice. First, when he receives it, and second, after the public announcement since he knows best the extent to which his information is already reflected in the pre-announcement price. Given his information he expects the price to overshoot and intends to partially revert his trade. While information leakage makes the price process more informative in the short-run, it reduces its informativeness in the long-run. The analysis supports Securities and Exchange Commission's Regulation Fair Disclosure.


Information leakage lowers market efficiency in the long run.

Huddart, Steven, John S Hughes, and Markus Brunnermeier. “Disclosure requirements and stock exchange listing choice in an international context”. Journal of Accounting and Economics 26 (1999): , 26, 237 - 269. Print.Abstract

We use a rational expectations model to examine how public disclosure requirements affect listing decisions by rent-seeking corporate insiders, and allocation decisions by liquidity traders seeking to minimize trading costs. We find that exchanges competing for trading volume engage in a ‘race for the top’ whereunder disclosure requirements increase and trading costs fall. This result is robust to diversification incentives of risk-averse liquidity traders, institutional impediments that restrict the flow of liquidity, and listing costs. Under certain conditions, unrestricted liquidity flows to low disclosure exchanges. The consequences of cross-listing also are modeled.


Competition among exchanges leads to a "race to the top" in disclosure standards.