Delegated Trade and the Pricing of Public and Private Information

61 Pages Posted: 11 Mar 2015 Last revised: 30 Aug 2015

See all articles by Daniel J. Taylor

Daniel J. Taylor

Wharton School, University of Pennsylvania

Robert E. Verrecchia

University of Pennsylvania - Accounting Department

Date Written: July 7, 2015

Abstract

We extend a standard, rational expectation model of trade to incorporate the possibility of individual investors delegating their trades to an informed financial intermediary. In the presence of delegated trade, we show that a firm's risk premium is a function of both the firm's exposure to a common risk factor and idiosyncratic characteristics of the firm's information environment. We show that even in a large economy, priced risks can manifest in the form of both idiosyncratic firm characteristics and common risk factors; as a consequence, factor-based asset pricing tests cannot rule out that a particular risk is priced.

Keywords: delegated trade; institutional investors; imperfect competition; risk premium; expected returns; information quality; accounting quality; idiosyncratic risk; asset pricing tests

JEL Classification: G11, G12, G14, G31

Suggested Citation

Taylor, Daniel and Verrecchia, Robert E., Delegated Trade and the Pricing of Public and Private Information (July 7, 2015). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2575887 or http://dx.doi.org/10.2139/ssrn.2575887

Daniel Taylor (Contact Author)

Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Robert E. Verrecchia

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

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