Market Power and Price Informativeness

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