Institutional Investors and Information Acquisition: Implications for Asset Prices and Informational Efficiency

NBER Working Paper No. 23561

Issued in June 2017

NBER Program(s):Asset Pricing



We jointly model the information choice and portfolio allocation problem of institutional investors who are concerned about their performance relative to a benchmark. Benchmarking increases an investor's effective risk-aversion, which reduces his willingness to speculate and, consequently, his desire to acquire information. In equilibrium, an increase in the fraction of benchmarked institutional investors leads to a decline in price informativeness, which can cause a decline in the prices of all risky assets and the market portfolio. The decline in price informativeness also leads to a substantial increase in return volatilities and allows non-benchmarked investors to substantially outperformed benchmarked investors.

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Document Object Identifier (DOI): 10.3386/w23561

Published: Matthijs Breugem & Adrian Buss, 2019. "Institutional Investors and Information Acquisition: Implications for Asset Prices and Informational Efficiency," The Review of Financial Studies, vol 32(6), pages 2260-2301.

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