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Information Quality, Learning and Stock Market Returns

Directory : Faculty : Intellectual Contributions

Intellectual Contribution by George Li

Contribution Title

Information Quality, Learning and Stock Market Returns

Publication

Journal of Financial and Quantitative Analysis

Co-author

Year

2005

Description

This paper studies how the precision of noisy public information that investors receive about the expected aggregate dividend growth rate affects stock market returns. We show that less precise information can increase the risk premium and stock return volatility. The numerical results from our calibrated model also show that noisy information can significantly increase the risk premium and stock return volatility. Our finding implies that noisy information may help better understand the large average risk premium and return volatility in the US financial market, and that it is optimal for firms to disclose to investors more precise information to reduce the cost of equity capital.

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