The tradeoff between risk sharing and information production in financial markets |
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Authors: | Joel Peress |
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Institution: | INSEAD, Department of Finance, Boulevard de Constance, 77305 Fontainebleau Cedex, France |
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Abstract: | The production of information in financial markets is limited by the extent of risk sharing. The wider a stock's investor base, the smaller the risk borne by each shareholder and the less valuable information. A firm which expands its investor base without raising capital affects its information environment through three channels: (i) it induces incumbent shareholders to reduce their research effort as a result of improved risk sharing, (ii) it attracts potentially informed investors, and (iii) it may modify the composition of the base in terms of risk tolerance or liquidity trading. Implications for individual firms and the market as a whole are derived. |
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Keywords: | D82 D83 G11 G12 G14 |
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