Impact of Private Investor Information in Equity Markets

Part B (Chapters 5 through 10) considers the impact of public information in competitive capital markets in which all investors receive the same information and are price takers. Part C (Chapters 11 and 12) considers the impact of private investor information and non-price taking behavior. Why are we interested in private investor information? As accounting researchers we are not interested in private information per se, but we have a particular interest in the interactive effect of public reports and private investor information. For example, it is widely recognized that investors often know much of the information content in an accounting report before it is released. One reason for this is that investors may have acquired that information privately before it is released. The major gain from private information comes from going long or short in a firm’s shares immediately before the release of a public report that causes the price to increase or decrease (and then reversing the position after the information is impounded in the price). Thus, intuitively, one expects investor demand for private information to increase immediately prior to an anticipated public report. Hence, a key question is how the informativeness of the accounting system affects the prior acquisition of private information. In addition, the timely release of earnings forecasts and other management information may reduce the incremental informativeness of a private signal and, thus, reduce the incentive to acquire the private signal.