Applications of endogenous information acquisition by institutional investors

Abstract

Acquiring information consumes investors' learning capacity, a valuable and limited resource that requires optimal allocation. Chapter One theoretically explores and empirically examines the roles of macroeconomic announcements when investors digest firm-earnings news. Macroeconomic announcements can distract investors upon being released if information about the aggregate risk competes with firm-earnings news to occupy investors' learning capacity. However, valuable information about the aggregate risk is disclosed to the general public via these announcements, temporarily lifting the burdens on investors to privately acquire such information and therefore leaving them more learning capacity to process firm-specific information. Combining these competing views, this chapter incorporates the releases of macroeconomic announcements into a rational inattention framework, and proposes the "attention re-allocation mechanism" to understand their effects on informational efficiency of individual firms. This mechanism confirms the distracting effects of macroeconomic announcements prior to being released and their complementary effects upon being released. This framework further predicts that these effects are more (less) pronounced during expansions (recessions). Empirical evidence is provided to support model predictions. Chapter Two revisits information acquisition theory from a corporate governance perspective. In this chapter, I provide a rational expectations framework to model monitoring and information acquisition and explore their within- firm and cross- firm interactions. My model proposes the "monitoring-for-learning" mechanism to describe that investors optimally re-allocate monitoring effort from firms with low value of information acquisition to firms with high value of information acquisition. This mechanism has empirical implications for information acquisition: Institutional investors tend to acquire more precise information about the firms they can more effectively engage with and about those they have larger holdings in. Chapter Three provides empirical evidence to support model predictions in Chapter Two.