Stock Price Informativeness and the Propagation of Idiosyncratic Shocks by Institutional Investors

Abstract

We study the market efficiency implications of the propagation of idiosyncratic shocks by institutional investors. We show that a stock's price informativeness decreases due to non-fundamental reasons when its institutional investors are exposed to stocks hit by natural disasters. Results are consistent with disaster-exposed investors shifting their attention towards disaster-hit stocks. The decrease in informativeness feeds into a lower sensitivity of corporate investment to stock prices. We also document that disaster exposed institutional investors mostly shift attention away from stocks that represent a small portfolio weight, while they tilt portfolios towards stocks with high portfolio weight, which experience an increase of their price informativeness.