School of Business Administration, University of Michigan, Ann Arbor. I am particularly indebted to David Scharfstein for comments which greatly improved this paper. I would also like to thank Anat Admati, Aaron Edlin, Bruce Grundy, Barbara Mace, Paul Milgrom, Paul Pfleiderer, Paul Seguin, Matt Spiegel, and Steve Slezak. All errors, of course, remain my own.
Crowding Out and the Informativeness of Security Prices
Article first published online: 30 APR 2012
1993 The American Finance Association
The Journal of Finance
Volume 48, Issue 4, pages 1475–1496, September 1993
How to Cite
PAUL, J. M. (1993), Crowding Out and the Informativeness of Security Prices. The Journal of Finance, 48: 1475–1496. doi: 10.1111/j.1540-6261.1993.tb04763.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
Individual investors trade less agressively on any particular piece of information as more investors observe it. The trades of the new investors observing a piece of information “crowd out” some of the trades of the old investors who observe that same piece of information. This paper shows that when traders are risk averse, these crowding out effects lead the proportions of traders who choose to observe one signal versus another to differ from the proportions that maximize the informativeness of prices.