The Impact Of Asymmetric Information On Asset Price

The impact of asymmetric information on asset price is a very important problem in financial studies, but this was ignored in modern asset pricing theory. While financial market microstructure focuses on asymmetric information, most market microstructure literature examines the impact of asymmetric information on asset price indirectly instead of studying the relationship between asymmetric information and asset's risk and expected return directly. This paper examines the implication of market microstructure theories for asset pricing and corporate finance, and studies the role of asymmetric information in asset pricing both theoretically and empirically. The main contents of the dissertation are as following:1st. Based on the traditional market microstructure theories, the impact of asymmetric information on asset price is analyzed indirectly. It is represented that the price system can be viewed as information dissemination system, and price, trade (including trade size, direction and time), and the effect of trade on price are all informative. The information content of stock trades in Chinese stock market is tested empirically by a VAR model.2nd. A simplified asset-pricing model is developed to relate asymmetric information with asset's risk and expected return, and demonstrate that "information risk" is one of the factors that affect asset pricing. While the asymmetric information can affect market liquidity and price discovery, symmetric information-based asset pricing models ignores the effect of asymmetric information. In standard asset pricing models information risk is only idiosyncratic risk witch can be diversified. This paper shows that information is one of the "risk factors" in asset pricing and can't be diversified.3rd. The impact of information attributes on the cost of equity capital is analyzed. This paper conclude that cost of equity capital is affected by the following attributes of information: the proportion of the information set that is private versus public (composition), the fraction of investors who are informed (dissemination), the overall precision of the information set (precision) and the existence of information (existence). The methods of estimating information composition and dissemination are developed, and the estimated results are used into asset pricing model to test the impact of information risk on the cost of capital in Chinese stock market.4th. The role of disclosure in reducing asymmetric information and the cost of capital is analyzed, and the relationship between public and private information is studied empirically by examining the effects of disclosure on price and liquidity.