Information and Heterogeneous Beliefs: Cost of Capital, Trading Volume, and Investor Welfare

Peter O. Christensen () and Zhenjiang Qin
Additional contact information
Peter O. Christensen: Aarhus University, Postal: Department of Economics and Business, Bartholins Allé 10, 8000 Aarhus C, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: In an incomplete market setting with heterogeneous prior beliefs, we show that public information can have a substantial impact on the ex ante cost of capital, trading volume, and investor welfare. In a model with exponential utility investors and an asset with a normally distributed dividend, the Pareto efficient public information system is the system which enjoys the maximum ex ante cost of capital, and the maximum expected abnormal trading volume. The public information system facilitates improved dynamic trading opportunities based on heterogeneously updated posterior beliefs in order to take advantage of the disagreements and the differences in con?dence among investors. This leads to a higher growth in the investors?certainty equivalents and, thus, a higher equilibrium interest rate, whereas the ex ante risk premium on the risky asset is unaffected by the informativeness of the public information system. In an effectively complete market setting, in which investors do not need to trade dynamically in order to take full advantage of their differences in beliefs, the ex ante cost of capital and the investor welfare are both higher than in the incomplete market setting, but they are independent of the informativeness of the public information system, and there is no information-contingent trade.

Keywords: Heterogeneous Beliefs; Public Information Quality; Dynamic Trading; Cost of Capital; Investor Welfare (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 (search for similar items in EconPapers)
Pages: 58
Date: 2012
New Economics Papers: this item is included in nep-cta
References: Add references at CitEc
Citations:

Downloads: (external link)
https://repec.econ.au.dk/repec/creates/rp/12/rp12_22.pdf (application/pdf)

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:aah:create:2012-22

Access Statistics for this paper

More papers in CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().