The Implications of Stock Ownership as a Consumption Good: A Theoretical Perspective

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. Mutual funds that cater to investors' tastes earn negative expected returns in equilibrium. We also show that asset prices may non-linearly react to signals about fundamentals, leading to booms and busts, as well as crashes and recoveries, if agents derive greater utility from stocks with high past fundamentals.