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

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  • Buss, Adrian
  • Breugem, Matthijs

Abstract

We study the joint portfolio and information choice problem of institutional investors who are concerned about their performance relative to a benchmark. Benchmarking influences information choices through two distinct economic mechanisms. First, benchmarking reduces the number of shares in investors' portfolios that are sensitive to private information. Second, benchmarking limits investors' willingness to speculate. Both effects imply a decline in the value of private information. Hence, in equilibrium, investors acquire less information and informational efficiency declines. As a result, return volatility increases and benchmarking can cause a decline in equilibrium stock prices. Moreover, less-benchmarked institutional investors outperform more-benchmarked ones.

Suggested Citation

  • Buss, Adrian & Breugem, Matthijs, 2018. "Institutional Investors and Information Acquisition: Implications for Asset Prices and Informational Efficiency," CEPR Discussion Papers 12900, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12900
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    Cited by:

    1. Nicolae Gârleanu & Lasse Heje Pedersen, 2022. "Active and Passive Investing: Understanding Samuelson’s Dictum [A noisy rational expectations equilibrium for multi-asset securities markets]," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 12(2), pages 389-446.

    More about this item

    Keywords

    Benchmarking; Institutional investors; Informational efficiency; Asset allocation; Asset pricing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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