Causal Effect of Information Costs on Asset Pricing Anomalies

56 Pages Posted: 13 Sep 2021 Last revised: 6 Jun 2023

See all articles by Yong Hyuck Kim

Yong Hyuck Kim

California State University Long Beach, Department of Finance

Zoran Ivkovich

Michigan State University, Department of Finance

Dmitriy Muravyev

Michigan State University - Department of Finance; Canadian Derivatives Institute

Date Written: February 22, 2021

Abstract

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

Kim, Yong Hyuck and Ivkovich, Zoran and Muravyev, Dmitriy, Causal Effect of Information Costs on Asset Pricing Anomalies (February 22, 2021). Available at SSRN: https://ssrn.com/abstract=3921785 or http://dx.doi.org/10.2139/ssrn.3921785

Yong Hyuck Kim (Contact Author)

California State University Long Beach, Department of Finance ( email )

1250 Bellflower Blvd.
College of Business, COB 200, CSULB
Long Beach, CA 90840
United States

Zoran Ivkovich

Michigan State University, Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Dmitriy Muravyev

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Canadian Derivatives Institute ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7
Canada

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