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Market Power and Informational Efficiency

Author

Listed:
  • Savitar Sundaresan

    (Columbia University)

  • Jaromir Nosal

    (Boston College)

  • Marcin Kacperczyk

    (Imperial College London)

Abstract

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.

Suggested Citation

  • Savitar Sundaresan & Jaromir Nosal & Marcin Kacperczyk, 2017. "Market Power and Informational Efficiency," 2017 Meeting Papers 356, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:356
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    References listed on IDEAS

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