Risk Sharing, Investment Efficiency, and Welfare with Feedback Effects
Social Science Research Network(2021)
摘要
Financial markets enable risk sharing and efficient allocation of capital. We characterize how these roles interact in a “feedback effects” model with diversely informed, risk-averse investors and a manager who learns from prices when making an investment decision. While learning from prices always improves investment efficiency, we identify a novel channel by which it can reduce welfare. Namely, investment decisions change the stock’s exposure to underlying shocks and, consequently, investors’ ability to hedge risk. We show that this is a robust feature of general investment decisions, and outline implications for firm governance and policy.
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