Non-traditional investors and information processing

This dissertation investigates the effect of two non-traditional investor types on the information environment of the firm and how their presence may affect the behavior of other market participants, with an emphasis on the processing of information. In the first chapter, I discuss the literature on information processing and the models which are applicable to the settings I examine. In the second chapter, I measure how shareholder activism may change capital market participants’ processing and incorporation of different types of information. Specifically, I examine the earnings response coefficient (ERC), price delay, and probability of informed trading (PIN), which capture the usage of firm-specific public information, public market-wide information, and firm-specific private information, respectively. I find an increase in ERC, price delay, and PIN during shareholder activism. The findings are consistent with a slower reflection of publicly available market-wide information and investors engaging in more public and private firm- specific information processing. Investors appear to substitute more general information with focused information about activist targets in their trading decisions. Additional tests on changes in 10-Qs during the period and cross-sectional tests on activist firm characteristics suggest the information processing switch is a conscious decision by investors. This switch is reflective of the investors’ sensitivity to higher quality information. In the third chapter, I investigate the information content of articles from the crowd-sourced investment advice platform Seeking Alpha, its price informativeness, and the source of its information advantage. A refined textual analysis methodology is employed to extract directional sentiment contents of economic events in coding Seeking Alpha documents. I find the directional sentiment of articles correlate with announcement returns and 90-day drift returns in the post-financial crisis period, incremental to the information in the most recent earnings surprise and earning announcement return. Additionally, the information leads the options market. Option volatility spread and volatility skew respond to news published in articles. Article information are reflected in analyst estimates, resulting in smaller earnings surprises for the subsequent quarter. These results show Seeking Alpha information is incremental to sophisticated investors such as options traders and analysts. Additional tests suggest it may reflect non-public information.Ph.D.Includes bibliographical reference