IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/118982.html
   My bibliography  Save this paper

Informational black holes in financial markets

Author

Listed:
  • Axelson, Ulf
  • Makarov, Igor

Abstract

We study how efficient primary financial markets are in allocating capital when information about investment opportunities is dispersed across market participants. Paradoxically, the very fact that information is valuable for making real investment decisions destroys the efficiency of the market. To add to the paradox, as the number of market participants with useful information increases a growing share of them fall into an "informational black hole," making markets even less efficient. Contrary to the predictions of standard theory, social surplus and the revenues of an entrepreneur seeking financing can be decreasing in the size of the financial market, the linkage principle of Milgrom and Weber (1982) may not hold, and collusion among investors may enhance efficiency.

Suggested Citation

  • Axelson, Ulf & Makarov, Igor, 2016. "Informational black holes in financial markets," LSE Research Online Documents on Economics 118982, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:118982
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/118982/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jeremy Bulow & Paul Klemperer, 2002. "Prices and the Winner's Curse," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 1-21, Spring.
    2. Bali, Valentina & Jackson, Matthew, 2002. "Asymptotic Revenue Equivalence in Auctions," Journal of Economic Theory, Elsevier, vol. 106(1), pages 161-176, September.
    3. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    4. Milgrom, Paul R, 1981. "Rational Expectations, Information Acquisition, and Competitive Bidding," Econometrica, Econometric Society, vol. 49(4), pages 921-943, June.
    5. Alp E. Atakan & Mehmet Ekmekci, 2014. "Auctions, Actions, and the Failure of Information Aggregation," American Economic Review, American Economic Association, vol. 104(7), pages 2014-2048, July.
    6. Ulf Axelson & Per Strömberg & Michael S. Weisbach, 2009. "Why Are Buyouts Levered? The Financial Structure of Private Equity Funds," Journal of Finance, American Finance Association, vol. 64(4), pages 1549-1582, August.
    7. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1991. "The Allocation of Talent: Implications for Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 503-530.
    8. Alex Edmans & Itay Goldstein & Wei Jiang, 2011. "Feedback Effects and the Limits to Arbitrage," NBER Working Papers 17582, National Bureau of Economic Research, Inc.
    9. McAfee, R Preston & McMillan, John & Reny, Philip J, 1989. "Extracting the Surplus in the Common-Value Auction," Econometrica, Econometric Society, vol. 57(6), pages 1451-1459, November.
    10. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-452, March.
    11. Itay Goldstein & Emre Ozdenoren & Kathy Yuan, 2011. "Learning and Complementarities in Speculative Attacks," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 263-292.
    12. Rajan, Raghuram G, 1992. "Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-1400, September.
    13. Ilan Kremer, 2002. "Information Aggregation in Common Value Auctions," Econometrica, Econometric Society, vol. 70(4), pages 1675-1682, July.
    14. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    15. Grossman, Sanford J, 1976. "On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information," Journal of Finance, American Finance Association, vol. 31(2), pages 573-585, May.
    16. Sanford J. Grossman, 1981. "An Introduction to the Theory of Rational Expectations Under Asymmetric Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(4), pages 541-559.
    17. Hong, Han & Shum, Matthew, 2004. "Rates of information aggregation in common value auctions," Journal of Economic Theory, Elsevier, vol. 116(1), pages 1-40, May.
    18. Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2016. "Cream-Skimming in Financial Markets," Journal of Finance, American Finance Association, vol. 71(2), pages 709-736, April.
    19. Gertner, Robert & Scharfstein, David, 1991. "A Theory of Workouts and the Effects of Reorganization Law," Journal of Finance, American Finance Association, vol. 46(4), pages 1189-1222, September.
    20. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
    21. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    22. Alex Edmans & Itay Goldstein & Wei Jiang, 2012. "The Real Effects of Financial Markets: The Impact of Prices on Takeovers," Journal of Finance, American Finance Association, vol. 67(3), pages 933-971, June.
    23. Audra L. Boone & J. Harold Mulherin, 2007. "How Are Firms Sold?," Journal of Finance, American Finance Association, vol. 62(2), pages 847-875, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Axelson, Ulf & Makarov, Igor, 2023. "Informational black holes in financial markets," LSE Research Online Documents on Economics 105042, London School of Economics and Political Science, LSE Library.
    2. Arnold, Lutz G. & Zelzner, Sebastian, 2022. "Financial trading versus entrepreneurship: Competition for talent and negative feedback effects," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 186-199.
    3. Thakor, Anjan V., 1996. "The design of financial systems: An overview," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 917-948, June.
    4. Dasgupta, Amil & Fos, Vyacheslav & Sautner, Zacharias, 2021. "Institutional investors and corporate governance," LSE Research Online Documents on Economics 112114, London School of Economics and Political Science, LSE Library.
    5. Jiasun Li, 2023. "Information Aggregation via Contracting," Journal of Finance, American Finance Association, vol. 78(2), pages 935-965, April.
    6. Giovanni Dell'Ariccia & Robert Marquez, 2008. "Can cost increases increase competition? Asymmetric information and equilibrium prices," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 144-162, March.
    7. John, Kose & Senbet, Lemma W., 1998. "Corporate governance and board effectiveness1," Journal of Banking & Finance, Elsevier, vol. 22(4), pages 371-403, May.
    8. Fich, Eliezer M. & Harford, Jarrad & Tran, Anh L., 2015. "Motivated monitors: The importance of institutional investors׳ portfolio weights," Journal of Financial Economics, Elsevier, vol. 118(1), pages 21-48.
    9. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    10. García, Diego & Urošević, Branko, 2013. "Noise and aggregation of information in large markets," Journal of Financial Markets, Elsevier, vol. 16(3), pages 526-549.
    11. Szilagyi, P.G., 2007. "Corporate governance and the agency costs of debt and outside equity," Other publications TiSEM 9520d40a-224f-43a8-9bf9-b, Tilburg University, School of Economics and Management.
    12. Matthias Blonski & Ulf Lilienfeld-Toal, 2023. "Moral hazard with excess returns," Mathematics and Financial Economics, Springer, volume 17, number 6, October.
    13. Steven Chong Xiao, 2020. "Do Noisy Stock Prices Impede Real Efficiency?," Management Science, INFORMS, vol. 66(12), pages 5990-6014, December.
    14. Burkart, Mike & Lee, Samuel & Petri, Henrik, 2020. "The Social Value of Debt in the Market for Corporate Control," CEPR Discussion Papers 15249, C.E.P.R. Discussion Papers.
    15. Goldstein, Itay & Yang, Liyan, 2019. "Good disclosure, bad disclosure," Journal of Financial Economics, Elsevier, vol. 131(1), pages 118-138.
    16. Tse-Chun Lin & Qi Liu & Bo Sun, 2015. "Contracting with Feedback," International Finance Discussion Papers 1143, Board of Governors of the Federal Reserve System (U.S.).
    17. Kyungmin Kim & Benjamin Lester & Braz Camargo, 2012. "Subsidizing Price Discovery," 2012 Meeting Papers 338, Society for Economic Dynamics.
    18. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 427-454, June.
    19. Timothy J. Brailsford & Barry R. Oliver & Sandra L. H. Pua, 2002. "On the relation between ownership structure and capital structure," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 42(1), pages 1-26, March.
    20. Loyola, Gino, 2012. "Optimal and efficient takeover contests with toeholds," Journal of Financial Intermediation, Elsevier, vol. 21(2), pages 203-216.

    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:118982. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.