42 Pages Posted: 9 Mar 2009 Last revised: 10 Sep 2013
Date Written: November 2009
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 of 43 brokerage firms' research operations in the U.S. 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 stock turnover, the more uncertain is the asset's payoff, and the noisier is the better-informed investors' 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 imply that information asymmetry has a substantial effect on asset prices and that a primary channel linking asymmetry to prices is liquidity.
Suggested Citation: Suggested Citation
Kelly, Bryan T. and Ljungqvist, Alexander, Testing Asymmetric-Information Asset Pricing Models (November 2009). NYU Working Paper No. 2451/28343. Available at SSRN: https://ssrn.com/abstract=1354509