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How Does Information Quality Affect Stock Returns?

Pietro Veronesi
The Journal of Finance
Vol. 55, No. 2 (Apr., 2000), pp. 807-837
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/222523
Page Count: 31
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How Does Information Quality Affect Stock Returns?
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Abstract

Using a simple dynamic asset pricing model, this paper investigates the relationship between the precision of public information about economic growth and stock market returns. After fully characterizing expected returns and conditional volatility, I show that (i) higher precision of signals tends to increase the risk premium, (ii) when signals are imprecise the equity premium is bounded above independently of investors' risk aversion, (iii) return volatility is U-shaped with respect to investors' risk aversion, and (iv) the relationship between conditional expected returns and conditional variance is ambiguous.

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