Browsing by Author "Vashishtha, Rahul"

A central function of commodity futures markets is to help firms in the real sector insure against commodity price fluctuations. I examine how greater availability of information about commodity fundamentals (henceforth, information transparency) affects the capacity of these markets to accommodate firms’ hedging needs. Theory suggests that while greater availability of information can reduce adverse selection and increase traders’ willingness to absorb risk, it can also accelerate the realization of risk and hinder the transfer of risk via the markets. Using both cross-sectional variation in information transparency across 26 commodity markets over 20 years and information shocks induced by the launch of the Agricultural Market Information System (AMIS) and the SEC’s revision of firms’ 10-K oil and gas reserve disclosures, I document that information transparency (i) makes it costlier to use commodity futures to hedge commodity price risk and (ii) reduces traders’ propensity to trade futures. Evidence suggests that these findings are consistent with theories positing that information disclosure impairs risk-sharing opportunities. This study contributes new evidence on how information influences the efficient allocation of commodity price risk across the real and financial sectors.

Disclosure complexity may increase the information asymmetry between sophisticated and retail investors, due to unsophisticated investors’ more limited capacity to process complex disclosures. I explore whether a 2004 Securities and Exchange Commission (SEC) rule that changed the timing of material contract disclosures helps mitigate this problem, by allowing investors more time to process periodic filings. Using data from quarterly financial statements and material contracts filed between 2001 and 2007, I find that the 2004 requirement significantly lowers the information asymmetry among investors immediately following quarterly financial statement disclosures. Moreover, the effect is more pronounced for firms that file more complex contracts, attract more retail investors, and experience greater change in the timeliness of their material contract filings. The effect is also larger for firms whose financial statements are disclosed during periods when investors are more time constrained. This evidence should be of interest to the SEC and other regulators who strive to level the information playing field among investors and to maintain fair and efficient markets.