The Demand-Driven Information Market

Abstract

We hypothesize a demand-driven information market where information production is tailored by investors’ investment constraints. Using a comprehensive data set of news releases and institutional equity holdings during the 2000–2016 period, we show that more negative (positive) news are produced for stocks overweighed (underweighted) by institutions. A natural experiment based on the 2003 mutual funds scandal confirms the negative relation between institutional investment constraints and news sentiment. The effect is more pronounced when the cost of information production is higher, especially when the distance between the information producer and a firm headquarter is larger. The asymmetry in information production causes stock returns to display negative skewness, increasing the probability for overweighed stocks to experience large negative price movement in the future.