Is Human-Interaction-based Information Substitutable? Evidence from Lockdown

We study information substitutability in the financial market through a quasi-natural experiment: the pandemic-triggered lockdown that has hampered people’s physical interactions and hence the ability to collect, process, and transmit human-interaction-based information. Exploiting the cross-sectional and time-series variation of lockdown and its implications for proximate investment, we investigate how the difficulty of using human-interaction-based information in lockdown has prompted a switch to non-interaction-based information. We show that lockdown reduces fund investment in proximate stocks and generates a portfolio rebalancing toward distant stocks. Such rebalancing negatively impacts fund performance by reducing fund raw (excess) returns an additional 0.51% (0.19%) per month during lockdown, suggesting that human-interaction-based and non-interaction-based information is not easily substitutable. Last, we show that the edge of human-interaction-based information originates preeminently from physical contacts, primarily in cafés, restaurants, bars, and fitness centers, and that the virtual world based on Zoom/Skype/Teams cannot substitute for personal meetings in generating sufficient information.