Costly Information Acquisition and Investment Decisions: Quasi-Experimental Evidence

Abstract

Despite a vast theoretical literature that builds on costly information acquisition, there is no direct evidence on the importance of information costs in investors’ private information choices. Using a large sample of Chinese mutual fund managers’ visits to firm headquarters and exploiting the introduction of high-speed railway as a quasi-natural experiment, I find substantial and quick responses to exogenous cost shocks: A one-standard-deviation travel time reduction increases site visits by 28% of the average frequency and semiannual stock trading profits by CNY 1.4 million at the fund family—firm pair level. These findings demonstrate investors’ elasticity to information costs.

Keywords: Information Acquisition, Information Costs, Site Visits, Trading Profits.

JEL Classification: G11, G14, G23, D82, D83