This article analyses the role of information in building reputation in an investment/trust game. The model allows for information asymmetry in a finitely repeated sender-receiver game and solves for sequential equilibrium to show that if there are some trustworthy managers who always disclose their private information and choose to return a fair proportion of the firm's income as dividend to the investor, then a rational manager will mimic such behaviour in an attempt to earn a reputation for being trustworthy. The rational manager will mimic with probability 1 in the early periods of the game. The investor, too, will invest with probability 1 in these periods. However, in the later periods, the rational manager will mimic with a certain probability strictly less than 1. The probability will be such that it will make the investor indifferent between investing and not investing, and he, in turn, will invest with a probability (strictly less than 1) that will make the rational manager indifferent between mimicking and not mimicking; that is, the game will begin with pure-strategy play but will switch to mixed-strategy play. There is one exception, though: when the investor's ex ante beliefs about the manager's trustworthiness are exceptionally high, the game will continue in a pure strategy, and the switch to mixed-strategy play will never occur. Identical results obtain if the manager's choice of whether to share his private information with the investor is replaced by exogenously imposed information sharing. © 2013 Copyright European Accounting Association.

This paper Examines experimentally the reputation building role of disclosure in an investment/trust game. It provides experimental evidence in support of sequential equilibrium behavior in a finitely repeated investment/trust game where information asymmetry raises the possibility of voluntary disclosure. I define two regimes, namely disclosure regime and no-disclosure regime and it is only in the disclosure regime that such disclosure of private information is a possibility. I compare investment levels across two regimes and find the startling result that investment is lower in disclosure regime. I find that this lower investment is attributable to the fact that the prior probability with which an investor in the disclosure regime believes that a manager is trustworthy is significantly lower than the prior probability with which an investor in the no-disclosure regime believes that a manager is trustworthy. I introduce a two-stage experimental design to homogenize prior beliefs about managers' trustworthiness and find that after such homogenization, investment is higher in disclosure. © 2013 Elsevier B.V.

This experiment examines forecasting behavior under varying information conditions to assess the extent to which traders in asset markets incorporate information in prices to resolve fundamental certainty and to resolve higher-order uncertainty. Fundamental uncertainty refers to a trader’s uncertainty about fundamental value of the asset while higher-order uncertainty refers to uncertainty about the beliefs of other traders about fundamental value of the asset. Such higher-order uncertainty is at the core of a large stream of more recent theoretical literature looking at information and price anomalies in asset markets. I find strong evidence that in an experimental asset market where higher-order beliefs play a role, subjects do not fully impound the information contained in prices to resolve either of the two uncertainties. However, in so far as resolving the higher-order uncertainty is concerned, they seem to better impound the information contained in other publicly available pieces of information.Keywords.