Are Investors Uninformed or Misinformed? A Proposition and a Test

26 Pages Posted: 7 Aug 2007 Last revised: 16 Dec 2009

Date Written: Decemberf 15, 2009


Fama and French (2006) show passive investment creates outsider efficient portfolio choice when inside information is exogenous. However, in Kane's alternative, investor passivity leads to outsiders' demise. We show that both results are consistent with the Fama-French analysis. It is the initial conditions that differ. Exogenous inside information - learned but not disclosed - produces Fama-French results. Kane assumes inside information is endogenous - generated creatively to maximize insider wealth. This difference is decisive for passive investors. A test shows that Mexico, Turkey and Thailand markets behave as though misinformed; German markets; as though better informed, and United States, best informed.

Keywords: rational investors, liberalized markets, CAPM, financial disclosure

JEL Classification: G11, G15, G21, G28

Suggested Citation

Dew, James Kurt, Are Investors Uninformed or Misinformed? A Proposition and a Test (Decemberf 15, 2009). Available at SSRN: or

James Kurt Dew (Contact Author)

Northeastern University ( email )

360 Huntington Ave,
Boston, MA 02115
United States

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