Working Paper: CEPR ID: DP15744
Authors: Massimo Massa; Jennie Bai
Abstract: We study the degree of information substitutability in the nancial markets; in particular, wefocus on the COVID pandemic that has made people's interaction far more dicult. Exploit-ing both the cross-sectional and time-series variations induced by lockdowns in the UnitedStates, we investigate how the diculty/inability to use soft information has prompted aswitch to hard information, and further the implication of such a switch on fund perfor-mance. We show that lockdowns reduce fund investment in proximate stocks and generate aportfolio rebalancing towards distant stocks. The rebalancing has negative implications onfund performance by reducing fund raw (excess) return of 0.76% (0.29%) per month duringthe lockdown, suggesting that soft and hard information is not easily substitutable. Softinformation originates with geographic proximity and human interactions, mostly in cafe,restaurants, bars, and tness centers. The most a ected funds are those more likely to relyon soft information which use a larger management team or sub-advisors. Our ndings notonly document the nature of soft information and its degree of substitutability with hardinformation, but also show that soft information requires \person-to-person" meetings andthus diminishes when such meetings are discontinued or hampered. This suggests that the\New World" based on Zoom/Skype/Team and remote connections will have direct negativeimplications in terms of the ability of collecting soft information and therefore to a ect fundperformance.
Keywords: mutual funds; soft information; COVID-19; proximity investing; performance
JEL Codes: G12; G2; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fund investment in proximate stocks (G23) | portfolio rebalancing towards distant stocks (G11) |
| funds relying more on soft information (G23) | performance deterioration (D29) |
| active portfolio reallocation during lockdowns (G11) | worse performance outcomes (D29) |
| COVID-19 lockdowns (F69) | fund investment in proximate stocks (G23) |
| portfolio rebalancing towards distant stocks (G11) | fund performance (G14) |