publication . Preprint . 2010

Information Aggregation and Investment Decisions

Christian Hellwig; Aleh Tsyvinski; Elias Albagli;
Open Access
  • Published: 01 Jan 2010
Abstract
This paper studies an environment in which information aggregation interacts with investment decisions. The first contribution of the paper is to develop a tractable model of such interactions. The second contribution is to solve the model in closed form and derive a series of implications that result from the interplay between information aggregation and the value of market information for the firms' decision problem. We show that the model generates an information aggregation wedge between price and expected dividend value. The information aggregation wedge is asymmetric: larger on the upside, when there is a lot of investment, and shares are over-valued, than...
17 references, page 1 of 2

[1] Bebchuk, Lucian A. and Jesse M. Fried (2003). "Executive Compensation as an Agency Problem" Journal of Economic Perspectives, 17. 71-92. [OpenAIRE]

[2] Bebchuk, Lucian A. and Lars A. Stole (1993). "Do Short-term Objectives Lead to Under or Overinvestment in Long-term Projects?" Journal of Finance, 48. 719-729.

[3] Diamond, Douglas and Robert Verrecchia (1981). "Information Aggregation in a Noisy Rational Expectations Economy," Journal of Financial Economics, 9(3). 221-235.

[4] Dow, James and Gary Gorton (1997). "Stock Market E ciency and Economic E ciency: Is There a Connection?," The Journal of Finance, 52 (3). 1087-1129.

[5] Dow, James and Rohit Rahi (2003). "Informed Trading, Investment, and Welfare," The Journal of Business, 76(3).

[6] Dow, James, Itay Goldstein and Alexander Guembel (2008). "Incentives for Information Production in Markets Where Prices A ect Real Investment," 2008. Unpublished manuscript.

[7] Glosten, L. and Paul Milgrom (1985). "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Journal of Financial Economics,14. 71-100. [OpenAIRE]

[8] Goldstein, Itay and Alexander Guembel (2008). "Manipulation and the Allocational Role of Prices," Review of Economic Studies, 75(1), 133-164.

[9] Grossman, Sanford J. and Joseph E. Stiglitz (1980). "On the Impossibility of Informationally E cient Markets," The American Economic Review, 70 (3), 393-408.

[10] Hellwig, Christian, Arijit Mukherji, and Aleh Tsyvinski (2006). "Self-Ful lling Currency Crises: The Role of Interest Rates," American Economic Review, 96 (5). 1769-1787.

[11] Hellwig, Martin (1980). "On the aggregation of Information in Competitive Markets," Journal of Economic Theory, 22. 477-498.

[12] Leland, Hayne (1992). "Insider Trading: Should It Be Prohibited?," The Journal of Political Economy, 100 (4). 859-887. [OpenAIRE]

[13] Milgrom, Paul R. and Robert J. Weber (1982). A Theory of Auctions and Competitive Bidding," Econometrica, 50 (5). 1089-1122. [OpenAIRE]

[14] Miller, Merton H. and Kevin Rock (1985). "Dividend Policy under Asymmetric Information," The Journal of Finance, 40 (4). 1031-1051.

[15] Rock, Kevin (1986). "Why New Issues are Underpriced," Journal of Financial Economics, 15 (1-2). 187-212. [OpenAIRE]

17 references, page 1 of 2
Powered by OpenAIRE Research Graph
Any information missing or wrong?Report an Issue