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Testing Asymmetric-Information Asset Pricing Models

46 Pages Posted: 18 Feb 2009  

Bryan T. Kelly

University of Chicago - Finance; 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: February 2009

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

JEL Classification: G12, G14, G17, G24

Suggested Citation

Kelly, Bryan T. and Ljungqvist, Alexander, Testing Asymmetric-Information Asset Pricing Models (February 2009). CEPR Discussion Paper No. DP7180. Available at SSRN: https://ssrn.com/abstract=1345707

Bryan T. Kelly

University of Chicago - Finance ( 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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