In situations of financial stress, depositors often use the stock price of their bank to guide their withdrawal behaviour, under the premise that the stock price contains information about the bank’s financial health. The inference of “bad news” from stock prices can trigger a self-fulling bank run. If traders anticipate such behaviour, would stock prices still be revealing about the bank’s health? In this study, we use an experiment that links the asset markets to the Diamond Dybvig (1983) bank-run game. Whilst our experiment finds that stock prices can be revealing about the bank’s health, we also find that stock prices are inflated when traders know that depositors can observe the market price. Depositors use market prices to guide their withdrawal decisions. Finally, we find that stock market prices can exacerbate bank runs.

Stocks of firms with high managerial ownership are often underpriced and yield excess returns. This phenomenon can be explained by moral hazard. A manager-owner is incentivized to exert effort to increase the firm’s value. If the stock price reflects this effort, the manager is better off selling her stocks and withholding effort. In equilibrium, therefore, prices are maintained at a low level at which the manager is indifferent between exerting effort and selling. We provide evidence for this explanation in an experimental market. With moral hazard, stocks are underpriced, with prices converging toward the equilibrium price. We further test the implications of a disclosure policy. Making managerial transactions public—as required, for example, by United States federal law—has two effects. First, prices converge rapidly to equilibrium. Second, as prices respond to current managerial holdings, managers are able to extract money by creating a “money pump”, buying at low prices and selling at high prices repeatedly.