The Effects and Value of Financial Information Under a Power Utility CAPM

44 Pages Posted: 19 Apr 2021

See all articles by David Johnstone

David Johnstone

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: April 15, 2021


Using a distribution-free "payoffs" CAPM derived under power utility, we examine the parameters of the payoff distribution that have greatest effect on the market equilibrium price, cost of capital and investor welfare. Results are necessarily all numerical, and are obtained by simulating from lognormal and normal payoff distributions. Those distributions are calibrated to approximate the empirical probability distribution of returns and payoffs on the S&P500. The overriding result is that the benefits to investors of better information arise most strongly via better estimates of the mean payoff. Estimation risk surrounding the payoff risk or variance prove surprisingly much less important. That result under our CRRA CAPM replicates similar results in finance under the conventional CARA mean-variance CAPM. We also confirm the inherent disconnection under equilibrium between the market cost of capital and investor welfare.

Keywords: CRRA CAPM, power utility, cost of capital, decision relevance, accounting information theory

JEL Classification: G11, G12, G31

Suggested Citation

Johnstone, David, The Effects and Value of Financial Information Under a Power Utility CAPM (April 15, 2021). Available at SSRN: or

David Johnstone (Contact Author)

University of Sydney Business School ( email )

Instute of Transport and Logistics Studies (C37)
The University of Sydney
Sydney, NSW 2133

Financial Research Network (FIRN)

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


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