The Journal of Finance

Motivating Management to Reveal Inside Information

Published: 9/1983,  Volume: 38,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1983.tb02294.x  |  Cited by: 3

BRETT TRUEMAN

This paper develops incentive schemes which motivate a manager to release private information that he has concerning the probabilities of occurrence of the various output levels of his firm. It is shown that, in the context of a pure‐exchange economy, a complete prohibition on the manager's trading in his firm's stock is sufficient to motivate him to truthfully release his private information. When the setting is extended to that of a production‐exchange economy, the manager must also be allowed to choose the production plan that he most prefers in order for him to be motivated to release his information truthfully. In fact, no incentive scheme in a general production‐exchange economy can be guaranteed to motivate the manager to release his information truthfully if he is not allowed to choose the production plan freely. However, when more structure is placed on the economy, such an incentive scheme can be developed as described in the latter part of this paper.

A Theory of Noise Trading in Securities Markets

Published: 3/1988,  Volume: 43,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1988.tb02590.x  |  Cited by: 73

BRETT TRUEMAN

In a recent article, Black [1] introduces a type of trading that he terms noise trading. He asserts that noise trading, which he defines as trading on noise as if it were information, must be a significant factor in securities markets. However, he does not provide an explanation of why any investors would rationally want to engage in noise trading. The goal of this paper is to provide such an explanation for one type of investor, managers of investment funds. As shown here, the incentive for a manager to engage in noise trading arises because of the positive signal that the level of the manager's trading provides about his or her ability to collect private information concerning current and potential investments. If the manager's compensation is directly related to investors' perceptions of his or her ability, the manager will then trade more frequently than is justified on the basis of his or her private information. In addition to providing this explanation for noise trading, the results of this analysis may also be useful for further empirical exploration of the relation between investment fund portfolio turnover and subsequent performance.

Optimality of the Disclosure of Private Information in a Production‐Exchange Economy

Published: 6/1983,  Volume: 38,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1983.tb02510.x  |  Cited by: 1

BRETT TRUEMAN

This study provides an analysis of the effects on individual welfare of information revelation in a production‐exchange economy. It is shown that the total effect of information revelation on an agent's utility level may be decomposed into three elements: a price effect, a shareholding effect, and a production effect. Through this decomposition, it is demonstrated that, although a Pareto improvement need not result from information revelation, there are perspectives from which the release can be considered beneficial.

Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns

Published: 4/2001,  Volume: 56,  Issue: 2  |  DOI: 10.1111/0022-1082.00336  |  Cited by: 836

Brad Barber, Reuven Lehavy, Maureen McNichols, Brett Trueman

We document that purchasing (selling short) stocks with the most (least) favorable consensus recommendations, in conjunction with daily portfolio rebalancing and a timely response to recommendation changes, yield annual abnormal gross returns greater than four percent. Less frequent portfolio rebalancing or a delay in reacting to recommendation changes diminishes these returns; however, they remain significant for the least favorably rated stocks. We also show that high trading levels are required to capture the excess returns generated by the strategies analyzed, entailing substantial transactions costs and leading to abnormal net returns for these strategies that are not reliably greater than zero.

An Information‐Based Theory of Time‐Varying Liquidity

Published: 3/18/2016,  Volume: 71,  Issue: 2  |  DOI: 10.1111/jofi.12272  |  Cited by: 55

BRENDAN DALEY, BRETT GREEN

We propose an information‐based theory to explain time variation in liquidity and link it to a variety of patterns in asset markets. In “normal times,” the market is fully liquid and gains from trade are realized immediately. However, the equilibrium also involves periods during which liquidity “dries up,” which leads to endogenous liquidation costs. Traders correctly anticipate such costs, which reduces their willingness to pay. This foresight leads to a novel feedback effect between prices and market liquidity, which are jointly determined in equilibrium. The model also predicts that contagious sell‐offs can occur after sufficiently bad news.

Securitization, Ratings, and Credit Supply

Published: 12/20/2019,  Volume: 75,  Issue: 2  |  DOI: 10.1111/jofi.12866  |  Cited by: 52

BRENDAN DALEY, BRETT GREEN, VICTORIA VANASCO

We develop a framework to explore the effect of credit ratings on loan origination. We show that ratings endogenously shift the economy from asignalingequilibrium, in which banks inefficiently retain loans to signal quality, toward anoriginate‐to‐distributeequilibrium with zero retention and inefficiently low lending standards. Ratings increase overall efficiency, provided that the reduction in costly retention more than compensates for the origination of some negative net present value loans. We study how banks' ability to screen loans affects these predictions and use the model to analyze commonly proposed policies such as mandatory “skin in the game.”

Due Diligence

Published: 3/4/2024,  Volume: 79,  Issue: 3  |  DOI: 10.1111/jofi.13322  |  Cited by: 30

BRENDAN DALEY, THOMAS GEELEN, BRETT GREEN

We propose a model of due diligence and analyze its effect on prices, payoffs, and deal completion. In our model, if the seller accepts an offer, the winning bidder (or “acquirer”) can gather information and chooses when to complete the transaction. In equilibrium, the acquirer engages in “too much” due diligence. Our quantitative results suggest that the magnitude of the distortion is economically significant. Nevertheless, allowing for due diligence can improve both total surplus and the seller's payoff compared to a setting without due diligence. We use our framework to explore the timing of due diligence, bidder heterogeneity, and breakup fees.