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Information Quality, Learning, and Stock Market Returns

Published online by Cambridge University Press:  06 April 2009

George Li
George Li
Affiliation:
1i123456@sfsu.edu, San Francisco State University, College of Business, 1600 Holloway Ave, San Francisco, CA 94132.
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Abstract

This paper studies how the precision of noisy public information that investors receive about the expected aggregate dividend growth rate affects stock market returns. I show that less precise information can increase the risk premium and stock return volatility. The numerical results from my calibrated model also show that noisy information can significantly increase the risk premium and stock return volatility. My finding implies that the presence of noisy information may help explain the large average risk premium and return volatility in the U.S. financial market. In addition, my finding suggests it is optimal for firms to disclose to investors more precise information to reduce the cost of equity capital.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 3 , September 2005 , pp. 595 - 620
Copyright
Copyright © School of Business Administration, University of Washington 2005

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