Asset Trade, Real Investment, and a Tilting Financial Transaction Tax

We study the impact of a financial transaction tax (FTT) in model that combines asset trading and real investment. An informed trader holds private information about fundamental value firm, firm’s manager relies on price to infer such invest accordingly. characterize an informative, but illiquid, equilibrium where is optimal trade inefficiently low, together with uninformative maximal liquidity inefficient firm value. Although FTT reduces trading, it may tilt market’s make prices more informative. situations which one or other these two effects prevails. The analysis also helps us reconcile some puzzling empirical evidence regarding adoption FTT. This paper was accepted by Bruno Biais, finance.