Public Information, Relative Overconfidence, and Capital Flows

Posted: 8 Jul 2021 Last revised: 4 Jan 2023

See all articles by Karthik Balakrishnan

Karthik Balakrishnan

Rice University - Jesse H. Jones Graduate School of Business

Darren Bernard

University of Washington - Department of Accounting

Kristina M. Rennekamp

SC Johnson Graduate School of Management; Cornell SC Johnson College of Business

Blake A. Steenhoven

Queen's University - Smith School of Business

Date Written: December 31, 2022

Abstract

Prior empirical literature suggests that increasing the public information available to investors increases capital flows to markets. While conventional explanations typically conclude this reflects a rational response to risk, it may also be that investors are overconfident in their ability to benefit from new information, even when it is publicly available and does not provide them a relative advantage. We provide archival evidence from horserace betting markets which shows that capital flows increase following the public provision of a summary measure of horse performance, despite the fact that average returns in parimutuel markets are fixed. We also conduct a controlled lab experiment to provide more direct causal evidence of our proposed mechanism. Combined, our archival and experimental results provide complementary evidence that suggests new public information can increase capital flows due to investors’ overconfidence in their ability to benefit from the information relative to others. Our findings have implications for regulators seeking to understand consequences of expanding the public information available to individual investors.

Keywords: public information, capital flows, overconfidence

JEL Classification: D80, G02, G14, M41, Z23

Suggested Citation

Balakrishnan, Karthik and Bernard, Darren and Rennekamp, Kristina M. and Steenhoven, Blake, Public Information, Relative Overconfidence, and Capital Flows (December 31, 2022). Available at SSRN: https://ssrn.com/abstract=3874155 or http://dx.doi.org/10.2139/ssrn.3874155

Karthik Balakrishnan (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Darren Bernard

University of Washington - Department of Accounting ( email )

PACCAR Hall
4273 E Stevens Way NE
Seattle, WA 98195-3200
United States

Kristina M. Rennekamp

SC Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-0500 (Phone)

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Blake Steenhoven

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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