Testing Asymmetric-Information Asset Pricing Models

46 Pages Posted: 18 Feb 2009

See all articles by Bryan T. Kelly

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER)

Alexander Ljungqvist

Stockholm School of Economics; 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

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alexander Ljungqvist (Contact Author)

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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