Working Paper: NBER ID: w24552
Authors: Yong Chen; Bryan Kelly; Wei Wu
Abstract: We study how sophisticated investors, when faced with changes in information environment, adjust their information acquisition and trading behavior, and how these changes in turn affect market efficiency. We find that, after exogenous reductions of analyst coverage due to closures of brokerage firms, hedge funds scale up information acquisition. They trade more aggressively and earn higher abnormal returns on the affected stocks. Moreover, the participation of hedge fund significantly mitigates the impairment of market efficiency caused by coverage reductions. Our results show a substitution effect between sophisticated investors and public information providers in facilitating market efficiency in a causal framework.
Keywords: sophisticated investors; market efficiency; natural experiment; hedge funds; analyst coverage
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reductions in analyst coverage (G24) | stock price efficiency (G14) |
| reductions in analyst coverage (G24) | hedge fund trading behavior (G41) |
| reductions in analyst coverage (G24) | information acquisition by sophisticated investors (G24) |
| hedge fund participation (G23) | market efficiency post-reduction (G14) |