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 non-benchmarked investors to substantially outperformed benchmarked investors.