Securities Markets Where Some Investors Receive Information About Cash Flow Betas

Abstract

We analyze a single-factor setting in which there is private information about cash flows as well as
their betas. The latter type of information multiplicatively affects cash flow volatility conditional
on order flows. This aspect, together with market makers’ risk aversion and betas’ non-negativity,
implies a stochastic price impact whose covariance with order flow is positive when the expected
factor payoff is positive, and vice versa. We predict a negative relation between the covariance and
expected returns, and an attenuation of the beta anomaly in asset returns after accounting for this
relation. Empirical tests confirm these predictions

Keywords: Beta information, price impact, asset prices

JEL Classification: G11, G12, G14