Information Quality and Asset Pricing: The Implications of Heterogeneous Learning

Information quality affects how investors with heterogeneous beliefs learn from new information. This paper presents a continuous-time general equilibrium model to investigate the asset pricing implications of heterogeneous learning. We find that the equity premium, equity volatility, and trading volume are bell-shaped functions of information quality. The bell-shape is driven by two opposite effects: the speculation effect and the learning effect. Empirically, our cross-country analysis provides the supporting evidence for the model. Using various measures of information quality, we recover the bell shape.