Investor Information Acquisition and Expected Fundamentals

In this study, we examine the extent to which information acquisition activities contain information about firms’ future fundamentals. We employ a novel dataset that captures the identity of EDGAR users, ranging from sophisticated institutional investors (e.g., hedge funds, investment banks) to less sophisticated non-institutional investors (e.g., retail investors). We predict and find that the information acquisition activities of more sophisticated, institutional users are more highly associated with information signals that are costlier to interpret and are targeted at firms that are harder-to-value than are the activities of less sophisticated, non-institutional investors. The information collection efforts of non-institutional investors are focused on familiar firms. We further predict that the information collection efforts of institutional investors are associated with future firm fundamentals. The results support this prediction, as these users’ activities relate to signals of future performance, profitability, operational efficiency, growth, and operating cash flow. In summary, this study provides early evidence on how sophisticated investors gain an informational advantage over other investors by examining sophisticated investors’ information collection efforts and documenting how these efforts correlate with signals of future firm performance.