Date Added: Aug 2009
Theoretical asset pricing models routinely assume that investors have heterogeneous information. The authors provide direct evidence of the importance of information asymmetry for asset prices and investor demands using plausibly exogenous variation in the supply of information caused by the closure of 43 brokerage firms' research operations in the U.S. Consistent with predictions derived from a Grossman and Stiglitz-type model, share prices and uninformed investors' demands fall as information asymmetry increases. Cross-sectional tests support the comparative statics: Prices and uninformed demand experience larger declines, the more investors are uninformed, the larger and more variable is stock turnover, the more uncertain is the asset's payoff, and the noisier is the better-informed investors' signal.