Information Asymmetry in Equity Markets Costs Economy $100 Billion Annually in Lost Investment, Wharton Study Finds

When companies issue new equity, they know far more about their true value than investors do. That information gap—what economists call "adverse selection"—isn't just a theoretical problem. According to new research from Wharton, it's costing the U.S. economy roughly $100 billion per year in lost investment.

The study, led by finance professor Thomas Winberry, applies George Akerlof's famous "lemons problem" to corporate finance. Akerlof won a Nobel Prize for showing how information asymmetry destroys used car markets: if buyers can't tell good cars from bad ones, they'll only pay average prices, which drives good cars out of the market. Winberry's research demonstrates the same dynamic plays out when companies try to raise capital, with measurable consequences for aggregate investment.

Here's the mechanism: when investors can't distinguish between high-quality firms and low-quality ones seeking equity financing, they rationally assume any company issuing shares might be a "lemon." This skepticism depresses valuations across the board. The result? Good companies face higher costs of capital than they should, which means some profitable projects never get funded. The economy loses investment that would have otherwise happened.

The $100 billion figure represents the annual deadweight loss from this information friction. To put that in perspective for finance leaders, it's roughly equivalent to 0.4% of U.S. GDP disappearing each year simply because investors and issuers can't perfectly communicate firm quality. That's not a rounding error—it's a structural drag on capital formation.

What makes this research particularly relevant now is the explosion of equity issuance over the past several years, combined with increased market volatility that makes quality signals even noisier. CFOs navigating equity raises in 2026 are operating in an environment where the "lemon discount" may be more severe than historical averages, particularly for growth companies without long track records.

The study also identifies what Winberry calls "lemon shocks"—periods when adverse selection problems intensify. These aren't random. They tend to cluster around moments when information asymmetry spikes: after regulatory changes that reduce disclosure requirements, during periods of high market uncertainty, or when new types of companies (think SPACs or AI startups with hard-to-value technology) flood the market.

For corporate finance teams, the implications are straightforward but not simple. The research suggests that signaling mechanisms—audited financials, credible third-party valuations, management skin in the game—aren't just nice-to-haves. They're economically valuable tools for separating yourself from the lemons. A company that can credibly demonstrate quality might capture some of that $100 billion in lost surplus by accessing capital at rates closer to its true risk profile.

The study builds on Akerlof's 1970 paper that introduced the lemons concept using used car markets as the canonical example. What Winberry adds is quantification: turning a theoretical insight about information problems into a measurable economic cost. That matters because it transforms adverse selection from an academic curiosity into a line item that shows up (implicitly) in weighted average cost of capital calculations.

The research also raises questions about market design. If information asymmetry is destroying this much value, what interventions might help? Enhanced disclosure requirements could reduce the problem but add compliance costs. Third-party certification mechanisms might work but create their own principal-agent issues. The optimal solution likely varies by industry and firm maturity.

One finding that should interest treasury teams: the adverse selection problem appears more severe for equity than debt, which helps explain the pecking order theory of corporate finance. Debt's fixed claims and covenants reduce information sensitivity, making it less vulnerable to lemon dynamics. This suggests companies with access to debt markets might rationally prefer that route even when equity would otherwise be optimal, purely to avoid the adverse selection tax.

The timing of this research is notable. As AI companies seek massive capital raises to fund infrastructure buildouts, and as traditional valuation metrics struggle to price companies with negative earnings but transformative technology, the information asymmetry problem may be entering a particularly acute phase. CFOs at high-growth firms should expect investors to demand stronger quality signals than ever—and to price in a hefty lemon discount if those signals aren't provided.