EconPapers    
Economics at your fingertips  
 

Feedback Effects and the Limits to Arbitrage

Itay Goldstein, Alex Edmans and Wei Jiang

No 9917, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper identifies a limit to arbitrage that arises because firm value is endogenous to the exploitation of arbitrage. Trading on private information reveals this information to managers and improves their real decisions, enhancing fundamental value. While this feedback effect increases the profitability of buying on good news, it reduces the profitability of selling on bad news. Thus, investors may refrain from trading on negative information, and so bad news is incorporated more slowly into prices than good news. This has potentially important real consequences -- if negative information is not incorporated into prices, inefficient projects are not canceled, leading to overinvestment.

Keywords: Feedback effect; Limits to arbitrage; Overinvestment (search for similar items in EconPapers)
JEL-codes: G14 G34 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-cfn
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://cepr.org/publications/DP9917 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Feedback Effects and the Limits to Arbitrage (2011) Downloads
Working Paper: Feedback Effects and the Limits to Arbitrage (2011) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:9917

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP9917
orders@cepr.org

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by (repec@cepr.org).

 
Page updated 2024-12-28
Handle: RePEc:cpr:ceprdp:9917