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Social Networks, Information Acquisition, and Asset Prices

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  • Bing Han

    (McCombs School of Business, University of Texas at Austin, Austin, Texas 78712; Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, 200030 Shanghai, China; and Guanghua School of Management, Peking University, 100871 Peking, China)

  • Liyan Yang

    (Joseph L. Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada)

Abstract

We analyze a rational expectations equilibrium model to explore the implications of information networks for the financial market. When information is exogenous, social communication improves market efficiency. However, social communication crowds out information production due to traders' incentives to “free ride” on informed friends and on a more informative price system. Overall, social communication hurts market efficiency when information is endogenous. The network effects on the cost of capital, liquidity, trading volume, and welfare are also sensitive to whether information is endogenous. Our analysis highlights the importance of information acquisition in examining the implications of information networks for financial markets. This paper was accepted by Wei Xiong, finance.

Suggested Citation

  • Bing Han & Liyan Yang, 2013. "Social Networks, Information Acquisition, and Asset Prices," Management Science, INFORMS, vol. 59(6), pages 1444-1457, June.
    • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:6:p:1444-1457
    DOI: 10.1287/mnsc.1120.1678
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    References listed on IDEAS

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