Testing Asymmetric-Information Asset Pricing Models

56 Pages Posted: 9 Jan 2009 Last revised: 16 Jul 2011

Bryan T. Kelly

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Alexander Ljungqvist

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 3 versions of this paper

Date Written: July 15, 2011

Abstract

Modern asset pricing theory is based on the assumption that investors have heterogeneous information. We provide direct evidence of the importance of information asymmetry for asset prices and investor demands using three natural experiments that capture plausibly exogenous variation in information asymmetry on a stock-by-stock basis for a large set of U.S. companies. Consistent with predictions derived from an asymmetric-information rational expectations model with multiple assets and multiple signals, we find that prices and uninformed investors' demands fall as information asymmetry increases. In the cross-section, these falls are larger, the more investors are uninformed, the larger and more variable is stock turnover, the more uncertain is the asset's payoff, and the more precise is the lost signal. We show that at least part of the fall in prices is due to expected returns becoming more sensitive to liquidity risk. Our results confirm that information asymmetry has a substantial effect on asset prices and imply that a primary channel linking asymmetry to prices is liquidity.

Keywords: Asymmetric-information asset pricing, liquidity, analyst coverage

JEL Classification: G12, G14, G17, G24

Suggested Citation

Kelly, Bryan T. and Ljungqvist, Alexander, Testing Asymmetric-Information Asset Pricing Models (July 15, 2011). Available at SSRN: https://ssrn.com/abstract=1324873 or http://dx.doi.org/10.2139/ssrn.1324873

Bryan T. Kelly

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Alexander Ljungqvist (Contact Author)

New York University (NYU) - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Belgium

Research Institute of Industrial Economics (IFN) ( email )

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Stockholm, SE-102 15
Sweden

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