Information Asymmetry And Stock Prices: A Theoretical And Empirical Study

This thesis, focused on an analysis of the information asymmetry betweenvarious investors in the stock market, attempts to unfold the impact of the asymmetricinformation on stock prices and the stock market efficiency. It involves the effect ofprivate information on stock prices, measurements of the degree of informationasymmetry in the stock market from a microeconomic perspective, the influence ofinformation asymmetry on stock prices in a segmented market and its impact on theoverall stock market efficiency, as well as relevant policy recommendations. Itconsists of 7 chapters, divided by theoretical study, empirical study and policyrecommendations. The relationship between information asymmetry and stock prices is in essencethe correlation between the change of stock prices and information revelation. Stockprices as mentioned in this thesis, if not specified, refer to the equation prices underthe condition of market clearing. In the three chapters thereafter, chapter 3, chapter 4 and chapter 5, a discussion ismade about the theory study. Based on equilibrium analysis in the goods market, this thesis examines theWalras equilibrium as applied in the stock market under the condition of completeinformation and then adapts it to the market with incomplete information, that is, amarket with asymmetric information. Analysis reveals that the Walras equilibrium isno longer workable. The thesis goes on to examine the relation between information revelation andthe change of stock prices from macroeconomic and microeconomic perspectives. Onthe macroeconomic level, the market efficiency is approached by analyzing itsrelation with information in three aspect; on the microeconomic level, the thesisexamines the rational expectation equilibrium theory, which accounts for theefficiency of the market. The exposition of the rational expectation equilibrium theory is carried out ontwo levels. On the first level, the exposition is based on the premise of a perfectly viiicompetitive market in the sense that all the participants in the market are recipients,whose action exerts no influence on price. The formation, existence, mechanism andequilibrium price of the rational expectation equilibrium are examined on the premiseof perfect competition. The examination of the two well-known paradoxes, byrevealing the illogicality and the limitation in the rational expectation theory, leads toa further analysis. On the second level, there are two noteworthy points. First, on the basis of thefirst level, "noise" is introduced to rationalize the model, thus avoiding paradoxes.This point is studied in terms of single-risk assets and multi-risk assets respectively.The second point is made on the premise of imperfect competition in the sense thatthere a limited number of participants in the market. Secondly, participants havecertain measure of influence on the market. By slackening the premise of perfectcompetition, the theory of rational expectation equilibrium is improved, becomingmore convincing. An interesting conclusion is drawn from the perspectives of singleinformer trader and multi-informer trader. Despite a satisfactory result derived fromthe premise of imperfect competition and the introduction of "noise", there remainsome problems. A simple case is made about this point, followed by a preliminarydiscussion of the concepts of heterogeneity, finite rationality and behavioral finance. Chapter 5 discusses the relation between the market efficiency and informationasymmetry and how to measure the degree of information asymmetry in the stockmarket since it plays such an important role in determining the stock prices. Thechapter 5 shows that the information asymmetry is the key factor to decrease themarket efficiency; therefore, the rest of the chapter 5 is focused on the measurementsof the degree of information asy...