Publication Type

Working Paper

Version

publishedVersion

Publication Date

1-2024

Abstract

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.

Keywords

information market, manipulation, score design, ratings, impact investing

Discipline

Finance | Finance and Financial Management

Research Areas

Finance

First Page

1

Last Page

96

Identifier

10.2139/ssrn.4712430

Publisher

SSRN

Additional URL

https://doi.org/10.2139/ssrn.4712430

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