Information aggregation in financial markets2010

This dissertation consists of three essays on information aggregation in financial markets. The first essay develops a model to study the interplay between information aggregation in financial markets and a firm's investment decision. We find that dispersed information results in a wedge between the stock price and expected dividend value of the firm. When the investment decision of the firm is endogenous to the share price, the wedge is asymmetric: larger on the upside when there is a lot of investment (shares are over-valued), than on the downside when there is little investment (shares are under-valued). On average, the share price is over-valued. We discuss the role of tying managerial incentives to the firm's share price, finding that such incentives exacerbate asset over-valuation...