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Effects of Shareholder Information on Corporate Decisions and Capital Market Equilibrium
Chandra Kanodia
Abstract
This paper examines the effect that imperfectly informed capital market agents have on the equilibrium paths of output, investment, and asset prices of value maximizing firms. Though information is imperfect, rational expectations is imposed as an equilibrium condition. It is found that both asset prices and corporate decisions are simultaneously affected in such a way that the efficiency-optimality relationship between them is preserved. The effect of a fuller information structure is to move the economy from one efficient markets equilibrium to another.
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