We analyze information acquisition by a firm and traders when the firm conditions its investment decision on information revealed through stock prices and is exposed to multiple sources of uncertainty. We highlight the delicate strategic interaction between both parties with regard to their incentives to acquire information. For positive NPV projects, there is a fundamental mismatch: traders want to collect the same information as the firm to maximize trading profits, but the firm optimally diversifies its information sources and acquires orthogonal information. For negative NPV projects, the agents' incentives are aligned, but multiple equilibria can lead to discontinuous jumps in firm values and stock prices. We connect the agents' information choices to real efficiency and price efficiency and highlight an inherent discrepancy between these two efficiency measures.

Canonical theories of trading assume that financial asset payoffs are linear in their fundamentals. This study argues and documents that the nonlinearity of equity and corporate bond payoffs (by virtue of their issuer’s solvency) has novel, important effects on their price formation. We show that informed risk-neutral speculation trades strategically in a firm’s stocks and bonds on the basis of their relative sensitivity to its value, a function of its perceived probability of default. As that probability changes so does the relative intensity of informed speculation (and adverse selection), yielding differential equilibrium liquidity provision from equity and bond dealers and non-monotonic stock-bond price comovement. We find supportive evidence within a comprehensive sample of intraday U.S. stock and corporate bond trades and prices.

Does information chasing or adverse selection prevail in the over-the-counter market? To answer this question we use bank trades in the European CDS market to identify privately informed trades. We merge CDS trades reported under the European Market Infrastructure Regulation (EMIR) with syndicated loans from DealScan, and compare the prices on similar CDSs that the same dealer offers to banks and to other investors. We find that banks lending to a corporation purchase CDSs on this corporation at lower prices, and that, after trading with banks, dealers position better their prices when trading with other investors. This supports empirically the theories of information chasing.