Strategic Trading and Delayed Disclosure by Informed Traders

Abstract

The current SEC regulation section 13(f) allows financial institutions to delay the disclosure of their quarter-end stock holdings up to 45 days. Motivated by a recent regulatory debate about the appropriate length of delay for disclosures, I develop a model to examine a financial institution’s optimal response in different regulatory environments in terms of permitted delay. I show that an institution with access to better information about stocks optimally chooses to delay filing its disclosure for as long as permitted by the regulations. I demonstrate that this forbearance results in higher levels of profits for the financial institution relative to the case with immediate disclosure. Furthermore, delayed disclosure has nuanced implications on market quality: while longer delays by financial institutions with access to private information render the markets less liquid, they result in prices that are more reflective of the fundamentals.