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Information and Capital Markets


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  • Joseph E. Stiglitz


This paper provides the foundations of a general theory of information and the capital market. We show that in a pure gambling market, even with asymmetric information, there cannot exist an equilibrium with trade with rational individuals. We argue that although a pure exchange stock market is not a pure gambling market, most of the trade on the stock market arises from irrationality on the part of some investors and the rational response on the part of other investors to take advantage of that irrationality. We show that the private returns to information acquisition and dissemination differ markedly from social returns and as a result the market equilibrium is not a (constrained) Pareto optimum. Moreover, we show how firms' actions, e.g. the fraction of shares retained by the original entrepreneurs, the debt equity ratio, and the level of investment, may convey information about firm characteristics. This in turn affects the behavior of firms. As a result, the original owners of firms will be incompletely diversified, firms will not take actions which maximize their stock market value, and, in particular, they may behave in a risk averse manner, paying attention to own risk (which traditional theory suggests that the only risk firms should care about is the correlation with the market).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0678.

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Date of creation: May 1981
Date of revision:
Publication status: published as Stiglitz, Joseph E. "Information and Capital Markets." In Financial Economics: Essays in Honor of Paul Cootner, ed. W.F. Sharpe and C.M. Cootner, pp. 118-158. New Jersey: Prentice-Hall, 1982.
Handle: RePEc:nbr:nberwo:0678

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Cited by:
  1. Joseph E. Stiglitz, 1986. "The General Theory of Tax Avoidance," NBER Working Papers 1868, National Bureau of Economic Research, Inc.
  2. Hellmann, Thomas & Stiglitz, Joseph, 2000. "Credit and equity rationing in markets with adverse selection," European Economic Review, Elsevier, Elsevier, vol. 44(2), pages 281-304, February.
  3. Swinnen, Johan F. M. & Gow, Hamish R., 1999. "Agricultural credit problems and policies during the transition to a market economy in Central and Eastern Europe," Food Policy, Elsevier, Elsevier, vol. 24(1), pages 21-47, February.
  4. Pardy, Robert, 1992. "Institutional reform in emerging securities markets," Policy Research Working Paper Series 907, The World Bank.
  5. Felipe Zurita, 2004. "Essays on Speculation," Levine's Working Paper Archive 618897000000000849, David K. Levine.


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