Firm size, information acquisition and price efficiency

Tian Zhao

Quantitative Finance, 2012, vol. 12, issue 10, 1599-1614

Abstract: We present a model in a competitive market where traders choose between a small and a large firm to acquire costly private information, but they also obtain free public information by observing equilibrium share prices. Our major finding is the existence of a noisy rational expectation competitive equilibrium, in which there are more informed traders of the large firm than those of the small firm. As a result, share prices of the large firm are more informative than those of the small firm. Our empirical study supports the analytical results. By using a bivariate vector autoregressive regression, we are able to conduct a variance decomposition of share prices for different size portfolios. We find that prices of large-size portfolios are more informative because non-value-related price shocks are less important in driving price changes of large-size portfolios than in the case of small-size portfolios.

Date: 2012
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DOI: 10.1080/14697688.2011.565364

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