The Effects of Information Availability and Cost on Investment Strategy Selection: An Experiment.

Using a computer-based set of experiments, this study explores the relationship between information cost and availability, and the investment strategy selections of subject-investors. Hypotheses about price-taking, risk-averse investors' preferences for costly financial information-seeking investment strategies are tested. The results showed that subjects exchanged expected return for reasonably costly financial information that reduced investment portfolio risk. However, uneconomical information had the effect of decreasing the frequency of information seeking strategies and increasing the frequency of both riskier and riskless strategies that did not require information acquisition. The level of investment activity in the experimental securities market was also found to be sensitive to the cost and availability level of information. These results confirm the importance of reasonably priced information for a securities market, and suggest that costly or unavailable information about securities' risk may inhibit capital formation. Within a financial reporting scenario, the results also address the importance of considering investor risk preferences in regulatory decisions concerning the provision of financial information.