Uncertainty and Market Efficiency: An Information Choice Perspective

We develop an information choice model where information costs are sticky and co-move with variations in firm-level intrinsic uncertainty as opposed to fluctuating with temporal variations in uncertainty. By incorporating analysts’ forecasts, we predict a negative relationship between information costs and information acquisition, as proxied by the predictability of analysts’ forecast biases. The model shows a contrasting pattern between information acquisition and intrinsic and temporal uncertainty, where intrinsic uncertainty strengthens return predictability of analysts’ biases through the information cost channel, while temporal uncertainty weakens it through the information benefit channel. We empirically confirm these opposing relationships that existing theories struggle to explain.