Limited rationality of traders, information disclosure quality and price discovery efficiency
LI Yang1, WANG Chunfeng1, XIANG Jiankai1, FANG Zhenming2
1. College of Management and Economics, Tianjin University, Tianjin 300072, China; 2. Research Center of Financial Engineering, Tianjin University, Tianjin 300072, China
Abstract：In China's less mature stock market, this study explored the equilibrium relationship between information disclosure quality and price discovery efficiency under the condition of limited rationality of traders. This study built two-period economic model containing information friction and traders' learning and introduced expected deviation and reference-dependent preferences to depict limited rational characteristics of traders. Then we discussed the market clearing process under the condition of complete rationality and limited rationality separately, and provided the theoretical explanation of PEAD (post earning announcement drift) and the way of suppressing price anomalies caused by traders' limited rationality. Our results show that: First, under the same conditions, the efficiency of price discovery is positively correlated with the information disclosure quality and negatively correlated with the degree of trader's limited rationality. Second, the reference-dependent preference of traders is the important reason for PEAD. When the listed company issues good news, traders are profitable, tend to be risk averse, will underestimate the value of the asset, so the market clearing price is lower than actual value. In the long term, stock prices tend to rise further. When a listed company declares bad news, the stock price tends to fall further in the long run because the investors are in loss state and tend to be risk preference, thus overestimating the asset value. Therefore, the market clearing price is higher than the actual value of the company. Our findings are of great significance to improve the information disclosure system and the operational efficiency of China's financial market. In the real financial market, listed companies may carry out positive earnings management to cater to investor sentiment, which makes the market price of listed companies significantly higher than their intrinsic value by decreasing the quality of information disclosure. Therefore, improving the quality of information disclosure is the key to reduce the negative effect of traders' limited rationality.
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2020, Vol. 40 
