📄 Abstract
This paper examines the role of information economics in explaining the persistence of inefficiencies within capital markets arising from information asymmetry between corporate insiders and external investors. Traditional financial theory, particularly the Efficient Market Hypothesis (EMH), assumes that security prices fully reflect all available information. In reality capital markets are characterized by unequal access to economically valuable information, creating adverse selection, moral hazard, and agency conflicts that distort investment decisions and corporate financing behaviour. Drawing upon the contributions of Akerlof, Spence, and Stiglitz, the analysis demonstrates that informational imperfections are not peripheral market anomalies but defining characteristics of financial transactions that systematically distort resource allocation. Specifically, the paper argues that adverse selection and moral hazard create persistent market frictions that increase the cost of capital, discourage efficient investment, and weaken market liquidity. Through examination of the Myers-Majluf pecking order framework, the analysis reveals how informational frictions generate persistent underinvestment problems, as high-quality firms forgo positive-net-present-value projects to avoid the equity signalling discount imposed by uninformed investors. The paper further explores the principal-agent conflicts arising from the separation of ownership and control, demonstrating how moral hazard manifests through excessive risk-taking, earnings manipulation, and managerial empire-building. To address these structural pathologies, the paper concludes that a tripartite institutional architecture of mandatory disclosure regimes, independent information intermediaries, and credible private signalling is indispensable for containing systemic inefficiency. Therefore, the paper contributes to the growing literature on information economics by providing a comprehensive framework for understanding how informational imperfections influence corporate behaviour, investor decision-making, and regulatory design in contemporary capital markets
🏷️ Keywords
📚 How to Cite:
Paul Wangila Sitati, Dr. Yasin Ghabon , CAPITAL MARKETS UNDER IMPERFECT INFORMATION: AN INFORMATION ECONOMICS PERSPECTIVE ON MARKET EFFICIENCY , Volume 14 , Issue 7, July 2026, EPRA International Journal of Economic and Business Review(JEBR) , Pages: 48 - 53 , DOI: https://doi.org/10.36713/epra28727