The Journal of Finance

The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.

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Learning by Owning in a Lemons Market

Published: 03/27/2022   |   DOI: 10.1111/jofi.13125

JORDAN MARTEL, KENNETH MIRKIN, BRIAN WATERS

We study market dynamics when an owner learns about the quality of her asset over time. Since this information is private, the owner sells strategically to a less informed buyer following sufficient negative information. In response, market prices feature a “U‐shape” and trading probabilities a “hump‐shape” with respect to the time to sale. As the owner initially acquires greater information, buyers suffer greater adverse selection, and prices fall accordingly. Eventually, the probability of an informed sale shrinks, and prices rebound. We provide evidence consistent with our model in markets for residential real estate, venture capital investments, and construction equipment.