Transmission of Information from Private to Public Markets

Abstract

We report evidence consistent with institutional investors using industry-level information that they obtain from their investments in venture capital (VC) funds to earn excess returns in publicly-traded equities. We use court rulings regarding the Freedom of Information Act as an exogenous shock affecting the information flow between VC firms and institutional investors to show that the excess returns are explained by information received via this channel. Thus, institutional investors serve as conduits of information, making publicly-traded stock prices more efficient and, in the process, earning higher returns from their VC investments than implied by the cash flows thereby received.

Keywords: Incorporation of information, stock prices, institutional investors, private equity, venture capital

JEL Classification: G11, G14, G23, G24