Potential information leakage and implications on discretionary liquidity traders

Abstract

A two-period framework has been constructed to examine the effects of potential information leakage on both the information and financial markets, where an informed agent is subject to post-disclosure requirements. As the probability of leakage increases, the informed agent becomes more compelled to exploit the information earlier, thereby making the early price more informative. However, the final price becomes less informative as the acquisition of information is discouraged. Discretionary liquidity traders would prefer the later period over the early one, and their discretion over timing demands further discourages the precision of information.