The Implications of Stock Ownership as a Consumption Good: A Theoretical Perspective

65 Pages Posted: 27 Mar 2016 Last revised: 17 Sep 2017

See all articles by Jiang Luo

Jiang Luo

Nanyang Technological University (NTU) - Division of Banking & Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

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Date Written: December 23, 2016

Abstract

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

Luo, Jiang and Subrahmanyam, Avanidhar, The Implications of Stock Ownership as a Consumption Good: A Theoretical Perspective (December 23, 2016). Asian Finance Association (AsianFA) 2017 Conference. Available at SSRN: https://ssrn.com/abstract=2754668 or http://dx.doi.org/10.2139/ssrn.2754668

Jiang Luo

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-01C-75 50 Nanyang Avenue
Singapore, 639798
Singapore

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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