On the Importance of Information Quality and Returns

This paper sheds light on the importance of information quality and returns for explaining welfare patterns driven by market-level fundamentals. On a complete capital market, the costly information disclosures can either improve or impair the overall welfare. First, the welfare lives with a marketable behavior of information purchasing that always causes welfare loss, with subject to market risk adjustments. Second, the welfare also depends on a non-marketable behavior evaluating the benefits and costs of the information revealing, which offsets the welfare cuts if the returns of utilizing the information dominate the costs of revealing it, or otherwise reinforces. Moreover, the welfare gains and loss are sensitive to the shocks to each market fundamental. On an incomplete capital market, the asymmetric information causes welfare cuts while as the intensity of information acquisition weakens, the negative effect becomes milder and the overall welfare can be Pareto-improved.