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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 16, No. 3, pp.295-322
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2003
Received 13 Feb 2003 Revised 11 Mar 2004

Optimal Use of Financial Information

Jhinyoung Shin
Associate Professor, School of Business, Yonsei University, Seoul, Korea, Tel: +82-2-2123-5467 jyshin@base.yonsei.ac.kr

JEL Classification: D82, G14, L13

Abstract

This paper investigates the conditions under which a possessor of valuable information on financial security may prefer to sell it directly or give it away free of charge i.e., donating it to other market participants instead of trading on it. A market participant will never find it optimal to sell or donate the information that s/he has monopolistic ownership of. Otherwise, sale or donation of information has an important commitment effect in that it credibly commits a risk neutral possessor of information to a strategy which promotes more intense competition among informed traders in the market and makes the trading strategies of other informed traders less aggressive. It is this strategic externality that makes the selling or donation of information an optimal strategy. The model in this paper also shows that if the security price does not fully reflect the private information of all the traders, diluting the seller's information before selling it is not optimal even if the seller trades on her own account while selling her information.

Keywords:

Strategic trading, Information sales, Donation of information, Financial information

Acknowledgments

The usual disclaimer applies.

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