Market for manipulable information

• Main Authors: CHEN, Hui, SUN, Jian
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: information market; manipulation; score design; ratings; impact investing; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7489; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8488/viewcontent/SSRN_id4712430.pdf
• Institution: Singapore Management University

We study how investors, firms, and information sellers interact in a market with manipulable information. To better predict the firm characteristics they care about, investors can buy a score from a monopolistic information seller, which aggregates signals that are subject to firm manipulation. The average degree of signal manipulability has no effect on the equilibrium, while the uncertainty about manipulability becomes a new source of noise. Its contribution depends on firms' incentive to manipulate the signals, which in turn depends on the equilibrium price sensitivity to the score. The optimal design of the score weighs signal precision against the endogenous uncertainty due to manipulation. The introduction of mandate investors, who care about the scores on the characteristics and not the characteristics themselves, generates an incentive for information sellers to inflate the scores. When applied to green investing, our model implies that the effectiveness of impact investing on the cost of capital could actually decline as the fraction of green investors or the strength of the mandate keeps rising, because they generate stronger incentives for manipulation.