How Does Benchmarking Affect Market Efficiency? The Role of Learning Technology

We study the impact of investors’ benchmarking concerns on market efficiency and asset pricing. Both separative and integrative learning technologies are examined as investors allocate limited attention across assets. We show that benchmarking can increase the price informativeness of benchmarked asset as investors optimally adopt integrative learning to observe a combined signal about asset payoffs. This is contrary to the result from the existing literature that assumes separative learning. Benchmarking can also increase the overall market efficiency with either type of learning. Yet, the implications for asset prices and comovements can be qualitatively different under different learning technology