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

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 nonbenchmarked investors to substantially outperformed benchmarked investors.

Portfolio Manager Compensation in the U.S. Mutual Fund Industry

“…Even though incentives based on the fund's AUM or the advisor's profit can be indirectly related to fund performance, our study shows that the factors underlying the design of those incentives are different from the factors driving explicit performance‐based incentives in the compensation contract. Those findings can provide guidance to theoretical models on portfolio delegation in the asset management industry (e.g., Cuoco and Kaniel (), Basak and Pavlova (), Buffa, Vayanos, and Woolley (), Koijen (), Breugem and Buss (), and Sotes‐Paladino and Zapatero ()).…”

Environmental, social and governance factors and assessing firm value: valuation, signalling and stakeholder perspectives

“…In securities investing, institutional shareholders assess financial and non‐financial information that describes the company, its strategy and risks, measures to assess performance, and governance processes to effectively deliver its strategy (Cottle et al ., 1988; Maginn et al ., 2007; Sullivan, 2017). This information is derived from public sources (such as company filings, websites and media reports) and private sources (including sell‐side analyst reports, consultant reports and meetings with company management), and turned into the institutional shareholder’s proprietary information through its own analysis of the risks and rewards of the company’s securities that it on‐sells to small shareholders as part of managing their savings (García and Vanden, 2009; Breugem and Buss, 2019). This set of information includes ESG information, either as company disclosures or provided by third parties as ESG matters to firm value (Aouadi and Marsat, 2016; Lo and Kwan, 2017; Amel‐Zadeh and Serafeim, 2018).…”

Emerging economies openness and efficiency

“…Hence, if foreign investors are less informed than domestic investors, their participation in emerging markets will impede the diffusion of information among investors and the incorporation of the information into stock prices. A more recent work by Breugem and Buss (2019) also suggests that if foreign investors, who are more likely to be institutional traders, are concerned about their performance relative to benchmark, benchmarking reduces the value of private information and causes information efficiency declines. Hence, according to these studies, opening the emerging markets could reduce the efficiency of the stock prices.…”