Information uncertainties and asset pricing puzzles: risk or mispricing?. Issue 12 (7th December 2015)

• Record Type: Journal Article
• Authors: Li, Keming; Uddin, Mohammad Riaz; Diltz, J. David
• Is Part Of: Managerial finance. Volume 41:Issue 12(2015)
• Page Start: 1280
• Page End: 1297
• Publication Date: 2015-12-07
• Subjects: Uncertainty -- Returns -- Information -- Cross-section; Corporations -- Finance -- Periodicals; Business enterprises -- Finance -- Periodicals; 658.1505
• DOI: 10.1108/MF-10-2014-0267
• Languages: English
• ISSNs: 0307-4358

Abstract

Abstract : Purpose: – Prior research has documented the role of information uncertainty in the cross-sectional variation in stock returns. Miller (1977) hypothesizes that if information uncertainty is caused by differences of opinion, prices will reflect only the positive beliefs due to short-sale constraints. These anomalous stock price behaviors may result from mispricing. In contrast, Merton (1974) asserts that default risk is a function of the uncertainty in the asset value process. Information uncertainty may be subsumed by credit or default risk. The paper aims to discuss these issues. Design/methodology/approach: – The authors employ various sorting techniques and Fama-MacBeth Regressions to test the hypotheses. Findings: – The authors provide empirical evidence consistent with Merton's (1974) default risk hypothesis and inconsistent with Miller's (1977) mispricing hypothesis. Research limitations/implications: – Risk aversion and not misplacing is the primary factor driving information-related anomalies in equities markets. Practical implications: – It would be quite difficult to find arbitrage opportunities in equities markets because there appears to be little, if any, mis-pricing due to information uncertainties. Originality/value: – This study provides important information about the primary underlying information-related source of certain empirical anomalies in the cross-section of stock returns.