Causal Effect of Information Costs on Asset Pricing Anomalies
56 Pages Posted: 13 Sep 2021 Last revised: 6 Jun 2023
Date Written: February 22, 2021
Active investors strive to beat the market by obtaining an information edge, a costly enterprise that reduces their net profits (Grossman and Stiglitz (1980)). We both causally identify and assess how these information costs affect stock anomalies. The SEC’s EDGAR slashed the costs of acquiring and trading on accounting information. Using the staggered EDGAR introduction, we show that average alphas for 125 accounting anomalies decline substantially; and the decline entirely explains pre-EDGAR alphas. By contrast, alphas for 80 non-accounting anomalies do not change significantly. Information costs are as substantial and important as other limits to arbitrage.
Keywords: Information costs, stock anomalies, EDGAR, limits to arbitrage
JEL Classification: G12, G14
Suggested Citation: Suggested Citation