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RFS Advance Access originally published online on February 10, 2005
Review of Financial Studies 2005 18(2):417-457; doi:10.1093/rfs/hhi015
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The Review of Financial Studies Vol. 18, No. 2 © 2005 The Society for Financial Studies; all rights reserved.

Information Leakage and Market Efficiency

Markus K. Brunnermeier
Princeton University

Address correspondence to: Princeton University, Department of Economics, Bendheim Center for Finance, 26 Prospect Avenue, Princeton, NJ 08540-5296, Tel. (609) 258 4050, or e-mail: markus{at}princeton.edu, http://www.princeton.edu/~markus

This article analyzes the effects of information leakage on trading behavior and market efficiency. A trader who receives a noisy signal about a forthcoming public announcement can exploit it twice. First, when he receives it, and second, after the public announcement since he knows best the extent to which his information is already reflected in the pre-announcement price. Given his information he expects the price to overshoot and intends to partially revert his trade. While information leakage makes the price process more informative in the short-run, it reduces its informativeness in the long-run. The analysis supports Securities and Exchange Commission's Regulation Fair Disclosure.


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