Abstract

http://ssrn.com/abstract=1463077
 
 

References (17)



 
 

Citations (12)



 


 



Financial Expertise as an Arms Race


Vincent Glode


University of Pennsylvania - The Wharton School

Richard C. Green


Carnegie Mellon University - David A. Tepper School of Business

Richard Lowery


University of Texas-Austin

July 6, 2011

Journal of Finance, 2012

Abstract:     
We show that firms intermediating trade have incentives to overinvest in financial expertise, and that these investments can be destabilizing. Financial expertise in our model improves firms' ability to accurately estimate value when trading a security. It creates adverse selection, which under normal circumstances works to the advantage of the expert. It deters opportunistic bargaining by counterparties. That advantage is neutralized in equilibrium, however, by offsetting investments competitors make. Moreover, when volatility rises the adverse selection created by expertise triggers breakdowns in liquidity, destroying gains to trade and thus the benefits that firms hope to gain through high levels of expertise.

Number of Pages in PDF File: 50

JEL Classification: G20, D82, C78

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Date posted: August 30, 2009 ; Last revised: March 15, 2013

Suggested Citation

Glode, Vincent and Green, Richard C. and Lowery, Richard, Financial Expertise as an Arms Race (July 6, 2011). Journal of Finance, 2012. Available at SSRN: http://ssrn.com/abstract=1463077

Contact Information

Vincent Glode (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
Richard C. Green
Carnegie Mellon University - David A. Tepper School of Business ( email )
315B Schenley Park
Pittsburgh, PA 15213-3890
United States
412-268-2302 (Phone)
412-268-7064 (Fax)
Richard Lowery
University of Texas-Austin ( email )
Red McCombs School of Business
Austin, TX 78712
United States
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