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The value of diffusing information

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  • Manela, Asaf

Abstract

How does the speed by which information diffuses affect its value to a stock market investor? In a structural model solved in closed-form, this speed has two opposing effects on the empirically dominant term of the value of information. Faster-diffusing information means quicker and less noisy profits, but, also increases competing informed trading, impounding more information into prices and eroding profits. Structural empirical analysis of stock market reaction to drug approvals using media coverage as a proxy for the transmission rate of information finds that the value of information is hump-shaped in its future transmission rate. Moreover, the estimated amount of noise trading is small.

Suggested Citation

  • Manela, Asaf, 2014. "The value of diffusing information," Journal of Financial Economics, Elsevier, vol. 111(1), pages 181-199.
  • Handle: RePEc:eee:jfinec:v:111:y:2014:i:1:p:181-199
    DOI: 10.1016/j.jfineco.2013.10.007
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    References listed on IDEAS

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    Cited by:

    1. Ganglmair, Bernhard & Holcomb, Alex & Myung, Noah, 2016. "Cutthroats or comrades: Information sharing among competing fund managers," MPRA Paper 71506, University Library of Munich, Germany.
    2. Buehlmaier, Matthias M. M. & Zechner, Josef, 2016. "Financial media, price discovery, and merger arbitrage," CFS Working Paper Series 551, Center for Financial Studies (CFS).
    3. Manela, Asaf & Moreira, Alan, 2017. "News implied volatility and disaster concerns," Journal of Financial Economics, Elsevier, vol. 123(1), pages 137-162.
    4. Avdis, Efstathios, 2016. "Information tradeoffs in dynamic financial markets," Journal of Financial Economics, Elsevier, vol. 122(3), pages 568-584.
    5. Zhiguo He & Asaf Manela, 2012. "Information Acquisition in Rumor Based Bank Runs," NBER Working Papers 18513, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Value of information; Information diffusion; Percolation; Media coverage; Drug approvals;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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