The Implications of Stock Ownership as a Consumption Good: A Theoretical Perspective
65 Pages Posted: 27 Mar 2016 Last revised: 17 Sep 2017
Date Written: December 23, 2016
We analyze a model with information asymmetry where owning stock confers direct utility, in addition to impacting wealth. In contrast to settings based on wealth considerations alone, expected stock prices deviate from expected fundamentals even when assets are in zero net supply. Stocks that yield high direct utility are, on average, more informationally efficient as they stimulate more entry into the market for these stocks and, consequently, more information collection. The analysis also accords with a value effect, high valuations of brand-name stocks, abnormally positive returns on “sin stocks,” volume premia in the crosssection of returns, proliferation of mutual funds and ETFs, and yields untested implications. Funds that cater to investors’ tastes earn negative expected returns in equilibrium. If, as psychological literature suggests, agents derive greater utility from successful companies by “basking in reflected glory,” then asset prices react to public signals non-linearly, leading to booms and busts, as well as crashes and recoveries.
Keywords: behavioral finance, market efficiency, value effect
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation