Testing Asymmetric-Information Asset Pricing Models

Alexander Ljungqvist () and Bryan Kelly

No 7180, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Theoretical asset pricing models routinely assume that investors have heterogeneous information. We provide direct evidence of the importance of information asymmetry for asset prices and investor demands using plausibly exogenous variation in the supply of information caused by the closure or restructuring of brokerage firms' research operations. Consistent with predictions derived from a Grossman and Stiglitz-type model, share prices and uninformed investors' demands fall as information asymmetry increases. Cross-sectional tests support the comparative statics. Prices and uninformed demand experience larger declines, the more investors are uninformed, the larger and more variable is turnover, the more uncertain is the asset's payoff, and the noisier is the better-informed investors' signal. We show that prices fall because expected returns become more sensitive to a liquidity-risk factor. Our results imply that information asymmetry has a substantial effect on asset prices and that a primary channel linking asymmetry to prices is liquidity.

Keywords: Analyst coverage; Asymmetric-information asset pricing; Liquidity (search for similar items in EconPapers)
JEL-codes: G12 G14 G17 G24 (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Testing Asymmetric-Information Asset Pricing Models (2012)
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