Market Power and Price Informativeness

53 Pages Posted: 12 Mar 2018 Last revised: 12 Oct 2020

See all articles by Marcin T. Kacperczyk

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics; Centre for Economic Policy Research (CEPR)

Jaromir B. Nosal

Columbia Business School - Economics Department

Savitar Sundaresan

Imperial College Business School

Date Written: October 9, 2020

Abstract

Large institutional investors dominate asset ownership worldwide, raising questions about their impact on the functioning and efficiency of financial markets. In this paper, we develop a general equilibrium theory to study the distributional effects of asset ownership for price informativeness when investors (oligopolists) have price impact and can learn about individual assets' payoffs. We find that price informativeness is non-monotonic in the oligopolists' aggregate size, decreasing in the sector's concentration, and in the size of the passive oligopolistic sector, the last effect arising jointly due to a decrease in aggregate information capacity and an amplification through an endogenous learning response. We decompose the determinants of price informativeness into (i) a learning channel and (ii) an information pass-through channel and show that the pass-through channel is a primary driver of the size results while both channels contribute to the concentration result.

Keywords: Market Power, Information, Institutions, Passive Investing

JEL Classification: G11, G14, G23

Suggested Citation

Kacperczyk, Marcin T. and Nosal, Jaromir B. and Sundaresan, Savitar, Market Power and Price Informativeness (October 9, 2020). Available at SSRN: https://ssrn.com/abstract=3137803 or http://dx.doi.org/10.2139/ssrn.3137803

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jaromir B. Nosal

Columbia Business School - Economics Department ( email )

1022 IAB Economics
420 W 118th Street
New York, NY 10027
United States
2128414005 (Phone)

Savitar Sundaresan (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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