Informational black holes in financial markets

Axelson, Ulf ORCID: 0000-0002-1265-2714 and Makarov, Igor ORCID: 0009-0006-7557-449X (2016) Informational black holes in financial markets. Financial Markets Group Discussion Papers (754). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We study how efficient primary financial markets are in allocating capital when information about investment opportunities is dispersed across market participants. Paradoxically, the very fact that information is valuable for making real investment decisions destroys the efficiency of the market. To add to the paradox, as the number of market participants with useful information increases a growing share of them fall into an "informational black hole," making markets even less efficient. Contrary to the predictions of standard theory, social surplus and the revenues of an entrepreneur seeking financing can be decreasing in the size of the financial market, the linkage principle of Milgrom and Weber (1982) may not hold, and collusion among investors may enhance efficiency.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2016 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D4 - Market Structure and Pricing > D44 - Auctions D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information G - Financial Economics > G1 - General Financial Markets > G10 - General G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
Date Deposited:	08 Jun 2023 10:03
Last Modified:	11 Dec 2024 19:46
URI:	http://eprints.lse.ac.uk/id/eprint/118982

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