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Testing Asymmetric-Information Asset Pricing Models

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  • Bryan Kelly
  • Alexander Ljungqvist

Abstract

We provide evidence for the importance of information asymmetry in asset pricing by using three natural experiments. Consistent with rational expectations models with multiple assets and multiple signals, we find that prices and uninformed demand fall as asymmetry increases. These falls are larger when more investors are uninformed, turnover is larger and more variable, payoffs are more uncertain, and the lost signal is more precise. Prices fall partly because expected returns become more sensitive to liquidity risk. Our results confirm that information asymmetry is priced and imply that a primary channel that links asymmetry to prices is liquidity. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 25 (2012)
Issue (Month): 5 ()
Pages: 1366-1413

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Handle: RePEc:oup:rfinst:v:25:y:2012:i:5:p:1366-1413

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Cited by:
  1. Alex Edmans & Vivian W. Fang & Emanuel Zur, 2013. "The Effect of Liquidity on Governance," Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1443-1482.
  2. James J. Choi & Li Jin & Hongjun Yan, 2013. "Informed Trading and Expected Returns," NBER Working Papers 18680, National Bureau of Economic Research, Inc.
  3. Kerry Back & Tao Li & Alexander Ljungqvist, 2013. "Liquidity and Governance," NBER Working Papers 19669, National Bureau of Economic Research, Inc.
  4. Karthik Balakrishnan & Mary B. Billings & Bryan T. Kelly & Alexander Ljungqvist, 2013. "Shaping Liquidity: On the Causal Effects of Voluntary Disclosure," NBER Working Papers 18984, National Bureau of Economic Research, Inc.
  5. He, Jie (Jack) & Tian, Xuan, 2013. "The dark side of analyst coverage: The case of innovation," Journal of Financial Economics, Elsevier, vol. 109(3), pages 856-878.
  6. Buckley, Winston & Long, Hongwei & Perera, Sandun, 2014. "A jump model for fads in asset prices under asymmetric information," European Journal of Operational Research, Elsevier, vol. 236(1), pages 200-208.
  7. Manela, Asaf, 2014. "The value of diffusing information," Journal of Financial Economics, Elsevier, vol. 111(1), pages 181-199.
  8. Irani, Rustom M. & Oesch, David, 2013. "Monitoring and corporate disclosure: Evidence from a natural experiment," Journal of Financial Economics, Elsevier, vol. 109(2), pages 398-418.

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