Implications of public information disclosure for strategic behaviors of heterogeneously informed traders and market quality

Basing on market microstructure theory, we try to analyze the implications of public information disclosure for heterogeneously informed traders' trading strategies, profits allocation and the consequent market quality (including market liquidity and market efficiency) on premise of multiple-fundamental assumption in a Kyle-type model (Kyle, 1985). We conclude the results as follows. Firstly, the informed trader, whose private information and the public information are on the same fundamental, trades on the public information reversely, and the relative weight between his trading on his private information and that on the public information decreases with the precision of the disclosed public information. Secondly, the informed trader, whose private information is about different fundamental from that of the public information, only trades on his private information. But his trading intensity is determined and increasing with the quality of the public information. In addition, public information disclosure reduces information asymmetry between the informed traders and market maker and so market liquidity is improved with information disclosure. Public information disclosure harms the welfare of the informed trader whose private information is from the same fundamental to the public information, whereas makes the heterogeneously informed trader and liquidity traders better off. However, market efficiency is nonmonotonic with the precision of the public information. We prove that there exists at least one threshold value which can be zero or some positive value, that when the precision of the disclosed information exceeds this threshold value, market efficiency will gets worsen with more precise public information. In our paper, public information promotes market liquidity by affecting strategic trading behaviors of the two heterogeneously informed traders, but can also generate counterproductive negative influence on the efficiency of asset pricing discovery-market information efficiency, and thus harm the overall market quality. Our findings provide meaningful theoretical foundations for the future reform of public information disclosure policy in China's securities market.