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Testing Asymmetric-Information Asset Pricing Models

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Author Info
Kelly, Bryan
Ljungqvist, Alexander P.

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Abstract

Theoretical asset pricing models routinely assume that investors have heterogeneous information. We provide direct evidence of the importance of information asymmetry for asset prices and investor demands using plausibly exogenous variation in the supply of information caused by the closure or restructuring of brokerage firms' research operations. Consistent with predictions derived from a Grossman and Stiglitz-type model, share prices and uninformed investors' demands fall as information asymmetry increases. Cross-sectional tests support the comparative statics. Prices and uninformed demand experience larger declines, the more investors are uninformed, the larger and more variable is turnover, the more uncertain is the asset's payoff, and the noisier is the better-informed investors' signal. We show that prices fall because expected returns become more sensitive to a liquidity-risk factor. Our results imply that information asymmetry has a substantial effect on asset prices and that a primary channel linking asymmetry to prices is liquidity.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7180.

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Date of creation: Feb 2009
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Handle: RePEc:cpr:ceprdp:7180

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Related research
Keywords: analyst coverage; Asymmetric-information asset pricing; liquidity;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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