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Testing Asymmetric-Information Asset Pricing Models

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  • Kelly, Bryan
  • Ljungqvist, Alexander P.

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

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Cited by:
  1. 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.
  2. 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.
  3. Alex Edmans & Vivian W. Fang & Emanuel Zur, 2011. "The Effect of Liquidity on Governance," NBER Working Papers 17567, National Bureau of Economic Research, Inc.
  4. Kerry Back & Tao Li & Alexander Ljungqvist, 2013. "Liquidity and Governance," NBER Working Papers 19669, National Bureau of Economic Research, Inc.
  5. Manela, Asaf, 2014. "The value of diffusing information," Journal of Financial Economics, Elsevier, vol. 111(1), pages 181-199.
  6. James J. Choi & Li Jin & Hongjun Yan, 2013. "Informed Trading and Expected Returns," NBER Working Papers 18680, National Bureau of Economic Research, Inc.
  7. 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.
  8. 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.

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