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

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.