Market Efficiency, the Cost of Capital, and Information Disclosure Quality

We explore the noisy rational expectation equilibrium with short-horizon traders with CARA preferences and show how, when asset information is heterogeneous and includes both private and public signals, the precision of information disclosure reflects fundamentals and liquidity trading in perfect competition. The results suggest that higher precision of public information disclosure, even under the influence of Keynesian beauty contests, still improves the financial market's efficiency. Traders' aversion to risk and risky asset supply has a positive relationship with the cost of capital. Crowding-out effects reduce traders' incentives to protect private information when public information disclosure is sensitive to traders