Market Power and Price Informativeness

The asset ownership structure in financial markets worldwide is dominated by large institutional investors. Relative to households, institutional investors own a larger fraction of assets, have a more concentrated distribution of ownership, and have significant active and passive components. We study the implications of these facts for the informational content of prices using a general equilibrium portfolio-choice model with market power and endogenous information acquisition. We decompose the effects of a changing market structure into three channels: (i) a size channel, (ii) a concentration channel, and (iii) an information passthrough channel, which we show is the quantitatively largest of the three. We find that price informativeness is non-monotonic in institutional sector's size, monotonically decreasing in institutional sector's concentration, and monotonically decreasing in the size of the passive sector both due to quantity effect and an amplifying learning effect