Delegated Trade and the Pricing of Public and Private Information

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Accounting Papers
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delegated trade
institutional investors
imperfect competition
risk premium
expected returns
information quality
accounting quality
idiosyncratic risk
asset-pricing tests
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Economics
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Taylor, Daniel J
Verrecchia, Robert E
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We extend a standard, rational expectation model of trade to incorporate the possibility of individual investors delegating their trades to an informed financial intermediary. In the presence of delegated trade, we show that a firm׳s risk premium is a function of both the firm׳s exposure to a common risk factor and idiosyncratic characteristics of the firm׳s information environment. We show that even in a large economy, priced risks can manifest in the form of both idiosyncratic firm characteristics and common risk factors; as a consequence, factor-based asset pricing tests cannot rule out that a particular risk is priced.

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2015-11-01
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