Information Choice, Uncertainty, and Expected Returns

Review of Financial Studies, forthcoming

80 Pages Posted: 10 Aug 2019 Last revised: 10 Dec 2020

See all articles by Charles Cao

Charles Cao

Pennsylvania State University

David Gempesaw

Miami University

Timothy T. Simin

Pennsylvania State University

Date Written: October 1, 2020

Abstract

We investigate how information choices impact equity returns and risk. Building on an existing theoretical model of information and investment choice, we estimate a learning index that reflects the expected benefits of learning about an asset. High learning index stocks have lower future returns and risk compared to low learning index stocks. Analysis of a conditional asset pricing model, long run patterns in returns and volatilities, other measures of information flow, and the information environment surrounding earnings announcements reinforce our interpretation of the learning index. Our findings support the model's predictions and illustrate a novel empirical measure of investor learning.

Keywords: Information Choice, Learning, Expected Returns, Cross-Section of Stock Returns, Volatility, Risk, Uncertainty

JEL Classification: G11, G12, G14

Suggested Citation

Cao, Charles and Gempesaw, David and Simin, Timothy T., Information Choice, Uncertainty, and Expected Returns (October 1, 2020). Review of Financial Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3231378 or http://dx.doi.org/10.2139/ssrn.3231378

Charles Cao

Pennsylvania State University ( email )

Department of Finance
Smeal College of Business
University Park, PA 16802
United States
814-865-7891 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://www.personal.psu.edu/qxc2/cao.html

David Gempesaw (Contact Author)

Miami University ( email )

Oxford, OH 45056
United States

Timothy T. Simin

Pennsylvania State University ( email )

University Park, PA 16802
United States
814-865-3457 (Phone)

HOME PAGE: http://timsimin.net

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