Liquidity cost vs. real investment efficiency

Marco Bade and Hans Hirth

Journal of Financial Markets, 2016, vol. 28, issue C, 70-90

Abstract: We study a model featuring endogenous information acquisition. Investment opportunities regularly depend on sources of uncertainty captured by prices. Learning from prices is crucial when investment efficiency matters. Trading profits of speculators in the secondary market lead to liquidity costs. Insider trading by the decision maker partially crowds out speculators but reduces investment efficiency. This can create a tradeoff between liquidity cost and investment efficiency that determines the information acquisition of decision makers. We find that the consideration of price discounts in the primary market incentivizes the decision maker to rely less on informational feedback from prices.

Keywords: Insider trading; Information acquisition; Informational feedback; Price informativeness; Real investment; Liquidity cost (search for similar items in EconPapers)
JEL-codes: D82 D83 D84 G1 G14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1386418115000646
Full text for ScienceDirect subscribers only

Related works:
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:eee:finmar:v:28:y:2016:i:c:p:70-90

DOI: 10.1016/j.finmar.2015.10.001

Access Statistics for this article

Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

More articles in Journal of Financial Markets from Elsevier
Bibliographic data for series maintained by Catherine Liu ().