Trading Costs and Informational Efficiency | Zendy

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Trading Costs and Informational Efficiency

Author(s) -

DÁVILA EDUARDO,

PARLATORE CECILIA

Publication year - 2021

Publication title -

the journal of finance

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 18.151

H-Index - 299

eISSN - 1540-6261

pISSN - 0022-1082

DOI - 10.1111/jofi.13008

Subject(s) - transaction cost , ex ante , private information retrieval , economics , monetary economics , microeconomics , business , financial economics , statistics , mathematics , macroeconomics

ABSTRACT We study the effect of trading costs on information aggregation and acquisition in financial markets. For a given precision of investors' private information, an irrelevance result emerges when investors are ex ante identical: price informativeness is independent of the level of trading costs. When investors are ex ante heterogeneous, a change in trading costs can increase or decrease price informativeness, depending on the source of heterogeneity. Our results are valid under quadratic, linear, and fixed costs. Through a reduction in information acquisition, trading costs reduce price informativeness. We discuss how our results inform the policy debate on financial transaction taxes/Tobin taxes.

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