In modern security markets information is sold and distributed to investors in a variety of ways. Brokerage (sell-side) analysts distribute reports and newsletters to a large number of clients, while buy-side employees and independent investment research firms offer investment advice to a small number of customers, often providing it only to the proprietary desk that commissions the research. Widely distributed investment advice seems to have little informational content, while the opposite is expected from more expensive personalized research.1 This heterogeneity raises a number of interesting questions: Why do such different allocations of information arise? What are the consequences for asset pricing properties such as informational efficiency and trading volume?
To answer these questions we study the problem of a financial intermediary selling information to strategic risk-averse traders across different types of markets. In essence, our paper takes the information sales problem of Admati and Pfleiderer (1986), and extends it to the non-competitive markets of Kyle (1985) and Kyle (1989). Our main contribution is to show that the contracts that arise endogenously as the solution to the information sales problem resemble the dichotomy observed in actual markets for information: either (i) sell to as many agents as possible very imprecise information, or (ii) sell to a single agent (or a small group of agents) information as precise as possible.
As in Admati and Pfleiderer (1988), the main tradeoff in the information sales problem is between maximizing aggregate expected profits and ex-ante risk-sharing. By extending their analysis to more general information structures, our research shows that the problem is highly convex, which yields these two corner solutions as the optimal selling mechanisms. The newsletters or rumors associated with solution (i) maximize ex-ante risk-sharing by splitting the information in such a way that agents hold very small risky portfolios. The exclusivity contracts in (ii) maximize expected trading profits by allowing a few well informed traders to noise trading per unit of risk-tolerance of the agents. We show that there is a threshold level above which risk sharing gains dominate the costs induced by competition and noisy signals, and the newsletters allocation is optimal; below the threshold the opposite is true.
In the newsletter equilibrium, a large number of traders are heterogeneously informed, and disagreement on the value of the asset generates high trading volume. The disagreement among many traders is an equilibrium outcome in our model. It provides a rational perspective on the empirical evidence documenting high trading volume. Since trading profits are lower when information is dispersed in the market than when is concentrated, our model predicts a negative relationship between trading volume and the aggregate trading profits earned by strategic agents.
The endogeneity of the information allocations in our model is a critical departure point from much of the literature on information and asset pricing. With exogenous information, many different empirical implications can be obtained by varying the set of signals available to traders. Even models with endogenous information limit the equilibrium information al-locations that can arise.2 Our paper considers very general signal structures, from the case of photocopied information (Admati and Pfleiderer, 1988) to signals with conditionally independent errors (personalized noise, as in Admati and Pfleiderer, 1986). While choosing from a large set of different informational arrangements, ourmodel provides sharp and strikingly simple predictions regarding equilibrium information allocations and asset prices.
