Short Horizons, Keynesian Beauty Contest, and Disclosure

Pingyang Gao, Yale University

ABSTRACT. I study the impact of investors' short horizons on disclosure. Dispersed ownership of modern corporations makes investors' horizons shorter than the maturity of stocks. Short-horizon investors distort the composition of public and private information in stock price and exhibit the Keynesian beauty contest feature by putting excess weight on public information and suppressing their private information. As public information becomes more precise, the distortion intensifies but prices are driven closer to fundamentals.

As both suppliers and consumers of information in stock market, managers should balance the use of public and private channels to disclose information by taking into account the effect of disclosure on their learning from prices. On the one hand, if they intend to tap into investors’ private information, managers disclose less public information. On the other hand, if they try to drive stock prices closer to fundamentals, managers commit to a more transparent policy.

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