Sophisticated Investors and Market Efficiency: Evidence from a Natural Experiment

65 Pages Posted: 14 Feb 2018 Last revised: 2 Aug 2019

See all articles by Yong Chen

Yong Chen

Texas A&M University - Department of Finance

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER)

Wei Wu

Texas A&M University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 19, 2018

Abstract

We study how sophisticated investors, when faced with shocks to information environment, change 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 and mergers of brokerage firms, hedge funds scale up information acquisition, trade more aggressively, and earn higher abnormal returns on the affected stocks. The hedge fund participation also mitigates the impairment of market efficiency caused by coverage reductions. Overall, in a causal framework, our findings suggest a substitution effect between sophisticated investors and public information providers in facilitating market efficiency.

Keywords: Hedge funds, information environment, market efficiency, information acquisition, analyst coverage

JEL Classification: G12, G14, G23

Suggested Citation

Chen, Yong and Kelly, Bryan T. and Wu, Wei, Sophisticated Investors and Market Efficiency: Evidence from a Natural Experiment (September 19, 2018). Mays Business School Research Paper No. 3117188; 29th Annual Conference on Financial Economics & Accounting 2018; Yale ICF Working Paper No. 2018-05. Available at SSRN: https://ssrn.com/abstract=3117188 or http://dx.doi.org/10.2139/ssrn.3117188

Yong Chen

Texas A&M University - Department of Finance ( email )

360 Wehner Building
College Station, TX 77843-4218
United States

Bryan T. Kelly (Contact Author)

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Wei Wu

Texas A&M University - Department of Finance ( email )

360M Wehner
College Station, TX 77843-4218
United States
979-862-8092 (Phone)

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