Where Has All the Data Gone?

Abstract

Since the finance industry is transforming into a data industry, measuring the quantity of data investors have about various assets is important. Informed by a structural model, we develop such a cross-sectional measure. We show how our measure differs from price informativeness and use it to document a new fact: data about large high-growth firms is becoming increasingly abundant, relative to data about other firms. Our structural model offers an explanation for this data divergence: large high-growth firms’ data became more valuable, as big firms got bigger and growth magnified the effect of these changes in size.

Data and Markets

“…In a decision theoretic framework, Frankel & Kamenica (2019) show that the information content of a piece of data is equivalent to the corresponding expected reduction in uncertainty. Alternatively, Farboodi et al (2022a) propose a structural approach to measure the quantity of investors' private data about different assets.…”

Hero or villain? The financial system in the 21st century

“…There exists some evidence of the S&P 500 index predicting firms' future earnings at longer horizons (see, e.g., Bai et al, 2016). However, Farboodi et al (2020) find that this may have been due to a composition effect; driven by large firms (a minority of all firms), whereas "the information content of small and value firm prices was flat or declining. "…”

“…However, Farboodi et al. (2020) find that this may have been due to a composition effect; driven by large firms (a minority of all firms), whereas “the information content of small and value firm prices was flat or declining.”…”

Market efficiency, margin requirements, and risk-taking

“…It is conceivable that the information environment of different firms varies substantially in the cross-section, as well as over time. Indeed, the prevailing literature shows that the recent trend for the aggregate market to become more efficient over time is concentrated among larger firms (Farboodi, Veldkamp, and Venkateswaran, 2021). The main reason proposed for this behavior is that more information is available for large firms, so that as information processing capacity has increased over time, the prices of large firms have become more efficient relative to small firms.…”

“…A notable development in the recent literature on market efficiency is that, within the cross-section of stocks, the informativeness of large firms is significantly greater than that of small firms (Farboodi, Veldkamp, and Venkateswaran (2021)). One explanation for this behavior is that investors generally have access to more and better data about large firms than small firms.…”