Firm opacity and financial market information asymmetry

• Information asymmetry (IA): between managers and investors and (2) between investors.
• Unimodal relation between two types of information asymmetries.
• Very high IA between managers and investors implies low IA between investors.

Information asymmetry could exist between the firm and the investors as well as among investors. If the information asymmetry between the firm and the investors is very high, all investors are largely uninformed, so information asymmetry between investors should be low. At the other extreme, if all investors are fully informed about the firm, again the information asymmetry between investors should be low. This paper finds evidence supporting such a nonlinear relationship between firm-to-investor and investor-to-investor information asymmetry. The inter-investor information asymmetry increases, and then declines, as the information asymmetry between the firm and the investor increases.