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Social Networks, Information Acquisition, and Asset Prices

Management Science, 2013, 59(6), 1444-1457

43 Pages Posted: 18 Mar 2011 Last revised: 21 Jun 2016

Bing Han

University of Toronto, Rotman School of Management

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: March 15, 2011

Abstract

We analyze a rational expectations equilibrium model to explore the implications of information networks for the financial market. When information is exogenous, social communication improves market efficiency. However, social communication crowds out information production due to traders' incentives to "free-ride" on informed friends and on a more informative price system. Overall, social communication hurts market efficiency when information is endogenous. The network effects on the cost of capital, liquidity, trading volume, and welfare are also sensitive to whether information is endogenous. Our analysis highlights the importance of information acquisition in examining the implications of information networks for financial markets.

Keywords: social communication, price informativeness, information acquisition, asset prices, liquidity, volume, welfare

JEL Classification: G14, G12, G11, D82

Suggested Citation

Han, Bing and Yang, Liyan, Social Networks, Information Acquisition, and Asset Prices (March 15, 2011). Management Science, 2013, 59(6), 1444-1457. Available at SSRN: https://ssrn.com/abstract=1787041 or http://dx.doi.org/10.2139/ssrn.1787041

Bing Han (Contact Author)

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

Liyan Yang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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