Sophisticated Investors and Market Efficiency: Evidence from a Natural Experiment

Yong Chen, Bryan Kelly and Wei Wu

No 24552, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-mst
Note: AP
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Citations: View citations in EconPapers (2)

Published as Yong Chen & Bryan Kelly & Wei Wu, 2020. "Sophisticated Investors and Market Efficiency: Evidence from a Natural Experiment," Journal of Financial Economics, .

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