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Crowding Out and the Informativeness of Security Prices

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  • Paul, Jonathan M

Abstract

Individual investors trade less aggressively on any particular piece of information as more investors observe it. The trades of the new investors observing a piece of information 'crowd out'some of the trades of the old investors who observe that same piece of information. This paper shows that when traders are risk averse, these crowding out effects lead the proportions of traders who choose to observe one signal versus another to differ from the proportions that maximize the informativeness of prices. Copyright 1993 by American Finance Association.

Suggested Citation

  • Paul, Jonathan M, 1993. "Crowding Out and the Informativeness of Security Prices," Journal of Finance, American Finance Association, vol. 48(4), pages 1475-1496, September.
    • Handle: RePEc:bla:jfinan:v:48:y:1993:i:4:p:1475-96
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    Cited by:

    1. Dai, Shangze & Fan, Fei & Zhang, Keke, 2022. "Creative Destruction and Stock Price Informativeness in Emerging Economies," MPRA Paper 113661, University Library of Munich, Germany.
    2. Tang, Ya, 2014. "Information disclosure and price discovery," Journal of Financial Markets, Elsevier, vol. 19(C), pages 39-61.
    3. Moresi, Serge, 2000. "Information acquisition and research differentiation prior to an open-bid auction1," International Journal of Industrial Organization, Elsevier, vol. 18(5), pages 723-746, July.
    4. Liu, Xia & Liu, Shancun & Qi, Zhen & Wen, Chunhui, 2020. "Discretionary liquidity trading, information production and market efficiency," Finance Research Letters, Elsevier, vol. 35(C).

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