Disclosure of Private Information by an Undiversified Owner

In Chapter 7 we consider the impact of public information in an equity market under pure exchange. The firms’ managers are ignored since their production decisions are assumed to be fixed, and they are assumed to play no role in determining the information publicly reported to investors. Investors, on the other hand, trade claims to implement their consumption plans and those trades, as well as the market prices of the traded claims, are endogenously determined. The public information system is exogenously specified, and the system specified may influence the investors’ consumption plans. However, a key result from Chapter 7 is that an anticipated change in the public information system has no impact on the investors’ consumption plans (and, hence, their expected utility) if they have homogeneous beliefs, time-additive preferences, and insurable consumption endowments. This result holds even though the trades used to implement the consumption plans, and the market prices, may be influenced by the information system.