Information Imprecision

44 Pages Posted: 4 May 2018 Last revised: 15 Mar 2020

See all articles by Ryan T. Ball

Ryan T. Ball

The Stephen M. Ross School of Business at the University of Michigan

Christine Cuny

New York University (NYU) - Leonard N. Stern School of Business

Date Written: March 10, 2020

Abstract

This study develops and applies a model-implied measure of information imprecision. We define information imprecision as the degree of noise in investors' prior beliefs about the firm's asset value based on the information set that is currently available. We present a model of credit default swap (CDS) spreads in which the term structure is a function of information imprecision. We exploit observable CDS spreads with short and long maturities to extract an empirical measure of information imprecision. We then examine the moderating role of our measure in two settings. First, we show that the equity market response to credit rating changes increases in the level of information imprecision before the announcement. Second, we show that bond-market professionals' ability to charge a premium to smaller investors, relative to larger investors, increases in the issuing firm's information imprecision. This evidence illustrates the broad applicability of our model-implied measure of information imprecision.

Keywords: Information Imprecision, CDS Spreads, Credit Ratings, Bond Trading

JEL Classification: D82, G14, G24

Suggested Citation

Ball, Ryan T. and Cuny, Christine, Information Imprecision (March 10, 2020). Available at SSRN: https://ssrn.com/abstract=3171824 or http://dx.doi.org/10.2139/ssrn.3171824

Ryan T. Ball

The Stephen M. Ross School of Business at the University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Christine Cuny (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Ste. 10-91
New York, NY NY 10012
United States
212-998-0423 (Phone)

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