Information Uncertainties and Asset Pricing Puzzles: Risk or Mispricing?

Managerial Finance, Forthcoming

33 Pages Posted: 27 Sep 2015

See all articles by Keming Li

Keming Li

Texas A&M University (TAMU) - San Antonio

Mohammad Riaz Uddin

Marshall University - Lewis College of Business

John David Diltz

University of Texas at Arlington

Date Written: September 25, 2015

Abstract

Prior research has documented the role of information uncertainty in the cross-sectional variation in stock returns. Miller (1977) hypothesizes that if information uncertainty is caused by differences of opinion, prices will reflect only the positive beliefs due to short-sale constraints. These anomalous stock price behaviors may result from mispricing. In contrast, Merton (1974) asserts that default risk is a function of the uncertainty in the asset value process. Information uncertainty may be subsumed by credit or default risk. We provide empirical evidence consistent with Merton’s (1974) default risk hypothesis and inconsistent with Miller’s (1977) mispricing hypothesis.

Keywords: Information uncertainty; Fundamental uncertainty; Valuation uncertainty

JEL Classification: G10; G12; G14

Suggested Citation

Li, Keming and Uddin, Mohammad Riaz and Diltz, John David, Information Uncertainties and Asset Pricing Puzzles: Risk or Mispricing? (September 25, 2015). Managerial Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2665711

Keming Li

Texas A&M University (TAMU) - San Antonio ( email )

One University Way
San Antonio, TX 78224
United States

Mohammad Riaz Uddin

Marshall University - Lewis College of Business ( email )

400 Hal Greer Boulevard
Huntington, WV 25755
United States

John David Diltz (Contact Author)

University of Texas at Arlington ( email )

Box 19449
Arlington, TX 76013
United States
817-272-3837 (Phone)

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