Sophisticated Investors and Market Efficiency: Evidence from a Natural Experiment

69 Pages Posted: 2 May 2018

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 - Mays Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 2018

Abstract

We study how sophisticated investors, when faced with changes in information environment, adjust 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 of brokerage firms, hedge funds scale up information acquisition. They trade more aggressively and earn higher abnormal returns on the affected stocks. Moreover, the participation of hedge fund significantly mitigates the impairment of market efficiency caused by coverage reductions. Our results show a substitution effect between sophisticated investors and public information providers in facilitating market efficiency in a causal framework.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Suggested Citation

Chen, Yong and Kelly, Bryan T. and Wu, Wei, Sophisticated Investors and Market Efficiency: Evidence from a Natural Experiment (April 2018). NBER Working Paper No. w24552. Available at SSRN: https://ssrn.com/abstract=3170771

Yong Chen (Contact Author)

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

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

Bryan T. Kelly

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 - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
17
Abstract Views
434
PlumX Metrics