Information Quality, Learning, and Stock Market Returns

George Li

Journal of Financial and Quantitative Analysis, 2005, vol. 40, issue 3, 595-620

Abstract: This paper studies how the precision of noisy public information that investors receive about the expected aggregate dividend growth rate affects stock market returns. I show that less precise information can increase the risk premium and stock return volatility. The numerical results from my calibrated model also show that noisy information can significantly increase the risk premium and stock return volatility. My finding implies that the presence of noisy information may help explain the large average risk premium and return volatility in the U.S. financial market. In addition, my finding suggests it is optimal for firms to disclose to investors more precise information to reduce the cost of equity capital.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:40:y:2005:i:03:p:595-620_00

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