Market Power and Informational Efficiency

Levels and concentration of institutional equity ownership have been growing steadily over the last few decades raising concerns of potential market insta- bility. We study theoretically and empirically the consequences of changes in ownership structure for informational content of prices, on average and across assets with di↵erent characteristics. Our theoretical framework is a general equilibrium portfolio-choice model with endogenous information acquisition and market power. We show that, in the cross section, an increase in institutional (informed) ownership increases price informativeness, and an increase in con- centration of ownership leads to lower informativeness. We confirm similar e↵ects in the data of U.S. stocks over the period 1980-2015. The policy ex- periments of changing ownership structure indicate a non-monotonic relation between the levels and concentration of ownership and price informativeness. We conclude that any policy targeting ownership structure should factor in its e↵ects on welfare through price informativeness.