Constrained Information Acquisition

Abstract

When a portion of institutional investors are prohibited from short selling, news that generates differences of opinions also affects information acquisition. Investors facing a short-sale prohibition (e.g., mutual funds) acquire less information when the sentiment of news is positive, as positive sentiment increases the likelihood that they will be unable to trade. Also, prices are more informative following news with negative sentiment than news with positive sentiment. These novel predictions are tested empirically using new measures of information acquisition derived from a hand-collected sample of mutual fund and hedge fund IP addresses. When the sentiment of recent news has been negative instead of positive, information acquisition by mutual funds increases by 16% relative to hedge funds, and prices are up to 14% more informative.

Keywords: Information Acquisition, Institutional Investors, Short Selling, EDGAR Log Files

JEL Classification: G14, G23