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Liquidity cost vs. real investment efficiency

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  • Bade, Marco
  • Hirth, Hans

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.

Suggested Citation

  • Bade, Marco & Hirth, Hans, 2016. "Liquidity cost vs. real investment efficiency," Journal of Financial Markets, Elsevier, vol. 28(C), pages 70-90.
    • Handle: RePEc:eee:finmar:v:28:y:2016:i:c:p:70-90
    DOI: 10.1016/j.finmar.2015.10.001
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    Cited by:

    1. Vladimirov, Vladimir & Terovitis, Spyros, 2020. "How Financial Markets Create Superstars," CEPR Discussion Papers 15546, C.E.P.R. Discussion Papers.
    2. Bade, Marco, 2017. "The effects of mergers and acquisitions on the information production of financial markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 240-248.
    3. Bade, Marco, 2016. "Insider competition under two-dimensional uncertainty and informational asymmetry," Finance Research Letters, Elsevier, vol. 19(C), pages 79-82.

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    More about this item

    Keywords

    Insider trading; Information acquisition; Informational feedback; Price informativeness; Real investment; Liquidity cost;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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