Working Paper: NBER ID: w23274
Authors: Azi Benrephael; Bruce I. Carlin; Zhi Da; Ryan D. Israelsen
Abstract: Previously, academics have used the supply of information that arrives to market (e.g., macroeconomic announcements, earnings reports, or news releases) to study how information affects asset prices and anomalies, and for tests of market efficiency. In this paper, we instead use measures of institutional and retail demand for information. We show that institutional demand for information is associated with increased trading volume and significant price movements. Average returns and betas are higher on days with higher institutional demand for information. The magnitude of these effects is much larger than those associated with the supply of news. However, the impact of demand for information from retail investors, while statistically significant, is quite small in magnitude. We also show that higher institutional demand alleviates mispricing in the market. In particular, higher information processing by institutional investors dampens momentum and enhances long-term reversals. As such, when demand for information increases, the market becomes more efficient.
Keywords: information demand; asset pricing; institutional investors; retail investors; market efficiency
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| institutional demand for information (D83) | trading volume (G15) |
| institutional demand for information (D83) | significant price movements (E30) |
| high AIA (L93) | higher average returns (G11) |
| low AIA (L93) | lower average returns (G19) |
| institutional demand for information (D83) | alleviates mispricing (G19) |
| institutional demand for information (D83) | dampens momentum (C69) |
| institutional demand for information (D83) | enhances long-term reversals (G41) |
| retail demand for information (L81) | smaller effect on price movements (G19) |