Asymmetrical Information in Securities Markets and Trading Volume

Dale Morse`
Unequal costs oI obtaining and processing inIormation may lead to trading oI securities and
wealth redistributions among investors. Those investors with easy access to inIormation
about a Iirm may be able to proIit Irom prior knowledge oI the inIormation beIore public
release. Public policy making bodies such as the SEC have attempted to alleviate this
phenomenon by promoting public disclosure oI inIormation through litigation and regulation
oI the trading activities oI insiders. Whether these procedures have been successIul in
curtailing trading due to privileged inIormation is still open to debate. Academicians have
also been concerned with resolving the existence oI asymmetrically distributed inIormation
and 'eIIicient markets. In spite oI the social and academic importance oI this phenomenon,
there has been little empirical work in this area. This is primarily due to a lack oI a testable
theoretical Iramework explaining investor behavior in securities markets with asymmetric
inIormation distribution. The ensuing paper provides a tentative testable theory on trading in
markets with asymmetrically distributed inIormation as well as an empirical investigation oI
this theory.
Footnotes
* Cornell University. The author would like to acknowledge the help oI his dissertation
committee (William Beaver, James Patell, and David Ng), workshops at StanIord, Cornell,
Carnegie-Mellon, the University oI Washington, the University oI British Columbia, the
University oI Chicago, and the University oI Oregon, and an anonymous reIeree