Paper: arXiv 2604.10194

Authors: Seongjin Kim, Jin Hyuk Choi

Abstract

We develop a multi-period Kyle-type model that incorporates both mandatory disclosure of informed trades and imperfect competition among market makers. We prove the existence and uniqueness of a linear equilibrium and show that the liquidity-enhancing effect of disclosure is fundamentally linked to the degree of market-making competition. Disclosure lowers trading costs by reducing price impact, and its marginal benefit is strictly larger when competition is weak. We empirically validate this prediction using the 2002 Sarbanes-Oxley Act disclosure reform as a natural experiment. A difference-in-differences analysis of U.S. equities confirms that the spread reduction following enhanced disclosure is significantly larger for stocks with fewer active market makers.

Complexity vs Empirical Score

  • Math Complexity: 7.5/10
  • Empirical Rigor: 7.0/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper provides a strong theoretical contribution by solving a multi-period Kyle-type equilibrium under imperfect competition and mandatory disclosure. It complements the microstructural theory with a well-designed empirical identification strategy using the Sarbanes-Oxley Act as a natural experiment.

Research Flowchart

  flowchart TD
    A["Research Question: How does market maker competition affect mandatory disclosure outcomes?"] --> B["Multi-Period Kyle-type Theoretical Model"]
    B --> C["Theoretical Finding: Disclosure lowers trading costs more when competition is weak"]
    
    D["Inputs: US Equities & 2002 SOX Disclosure Reform"] --> E["Empirical Testing: Difference-in-Differences Analysis"]
    C --> E
    
    E --> F["Key Outcome: Empirical proof that spread reduction is larger for stocks with fewer market makers"]

Cited References (14)

  1. Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement (2016) — link
  2. The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research (2015) — link
  3. Mandatory Portfolio Disclosure, Stock Liquidity, and Mutual Fund Performance: Portfolio Disclosure, Liquidity, and Fund Performance (2014) — link
  4. Concentrated Equilibrium and Intraday Patterns in Financial Markets (2013) — link
  5. Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most (2012) — link
  6. Inside trading, public disclosure and imperfect competition (2011) — link
  7. The Law and Economics of Self-Dealing (2008) — link
  8. Stock Exchange Disclosure and Market Development: An Analysis of 50 International Exchanges (2006) — link
and 6 more
  1. Risk aversion, public disclosure, and long-lived information (2004) — link
  2. Competing market makers,liquidity provision,and bid-ask spreads $ (2001) — link
  3. Public Disclosure and Dissimulation of Insider Trades (2001) — link
  4. Law and Finance (1998) — link
  5. Continuous Auctions and Insider Trading (1985) — link
  6. Oligopolistic kyle models: Discrete-time limits and continuous-time admissibility (2026)

0 of 14 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.