From Data to Information: Does the Internet Oversupply the Market with Data?

Abstract

In this study I examine how the amount of publicly available data influences price discovery and information asymmetry. Increased accessibility of firm-specific data may speed price discovery and decrease information asymmetry in capital markets through decreased search and discovery costs. Too much data, however, may slow price discovery and increase information asymmetry because of increased friction arising from market participants being unable to promptly transform this overabundance of data into useful information. Using a novel measure of firm data availability, I examine the relation between it and price formation and information asymmetry around earnings announcements. I find that abnormally high data availability is negatively associated with the speed at which earnings information is impounded into price (i.e. slower price discovery) and positively associated with information asymmetry measures around earnings announcements, and these findings are driven by large firms. Conversely, traditional news coverage and investor search for information are associated with faster price discovery and less information asymmetry around earnings announcements (consistent with prior research). I also find evidence that the relation between data availability and price discovery is concave, suggesting that more data initially speeds price discovery but at some level begins to act as a market friction. Overall, my findings suggest that an overabundance of publicly available data “muddies the water” and impedes the impounding of information into stock prices.