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The tradeoff between risk sharing and information production in financial markets

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  • Peress, Joel

Abstract

The production of information in financial markets is limited by the extent of risk sharing. The wider a stock's investor base, the smaller the risk borne by each shareholder and the less valuable information. A firm which expands its investor base without raising capital affects its information environment through three channels: (i) it induces incumbent shareholders to reduce their research effort as a result of improved risk sharing, (ii) it attracts potentially informed investors, and (iii) it may modify the composition of the base in terms of risk tolerance or liquidity trading. Implications for individual firms and the market as a whole are derived.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 145 (2010)
Issue (Month): 1 (January)
Pages: 124-155

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Handle: RePEc:eee:jetheo:v:145:y:2010:i:1:p:124-155

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Information choice Learning Asymmetric information Risk sharing Shareholder base expansion Non-expected utility Kreps-Porteus preferences;

References

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Cited by:
  1. Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Information Immobility and the Home Bias Puzzle," Journal of Finance, American Finance Association, vol. 64(3), pages 1187-1215, 06.
  2. Pablo Kurlat & Laura Veldkamp, 2012. "Should We Regulate Financial Information," Working Papers 12-15, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Lee, Hei Wai & Valero, Magali, 2010. "Cross-listing effect on information environment of foreign firms: ADR type and country characteristics," Journal of Multinational Financial Management, Elsevier, vol. 20(4-5), pages 178-196, December.

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