Article ID Journal Published Year Pages File Type
960914 Journal of Financial Markets 2016 21 Pages PDF
Abstract
We study a model featuring endogenous information acquisition. Investment opportunities regularly depend on sources of uncertainty captured by prices. Learning from prices is crucial when investment efficiency matters. Trading profits of speculators in the secondary market lead to liquidity costs. Insider trading by the decision maker partially crowds out speculators but reduces investment efficiency. This can create a tradeoff between liquidity cost and investment efficiency that determines the information acquisition of decision makers. We find that the consideration of price discounts in the primary market incentivizes the decision maker to rely less on informational feedback from prices.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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