Financial Market Equilibrium When Information is Asymmetric and Stock Ownership is a Consumption Good

Abstract

We analyze a model with information asymmetry where owning certain types of stock confers direct utility, in addition to impacting wealth. Phenomena such as a value effect, negative expected profits from trading, and volume premia arise naturally in this setting. In contrast to the more traditional wealth effects of financial assets, expected stock prices deviate from expected fundamentals even when assets are in zero net supply. We predict that this deviation will be more prevalent if a larger proportion of agents directly derive extreme utility or disutility from holding stock. We also show that asset prices may non-linearly react to signals about fundamentals, leading to booms and busts, and crashes and recoveries, if agents derive greater utility from stocks with high past fundamentals.