Working Paper: NBER ID: w23561
Authors: Matthijs Breugem; Adrian Buss
Abstract: 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.
Keywords: institutional investors; information acquisition; asset prices; informational efficiency
JEL Codes: G11; G14; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in the fraction of benchmarked institutional investors (G23) | Decline in price informativeness (G14) |
| Decline in price informativeness (G14) | Decline in prices of non-index stocks (G19) |
| Increase in the fraction of benchmarked institutional investors (G23) | Decline in prices of all risky assets (G19) |
| Decline in price informativeness (G14) | Higher return volatility for all stocks (G17) |
| Increase in the fraction of benchmarked institutional investors (G23) | Negative impact on performance of benchmarked investors (G41) |