Institutional Investors and Information Processing Skill

Abstract

Firms that maintain business operations in multiple industries (i.e. conglomerate firms) demand high levels of information processing from investors. This study examines the ability of financial institutions to exploit pricing delays in conglomerate firms in an attempt to determine whether institutional investors possess and utilize information processing skill. On average, institutional trading in conglomerate firms yields significantly lower returns than institutional trading in firms that demand relatively low levels of information processing. A significant barrier to profitable institutional trading in conglomerate firms is the concentration of conglomerate firms in the institution’s portfolio. When demands for institutional investor attention are high financial institutions fail to demonstrate information processing skill. This study provides insight into how attention constraints and information processing costs influence the effectiveness of institutional investor skill.