Big Data as a Governance Mechanism

Abstract

This study empirically investigates two effects of alternative data availability: stock price informativeness and its disciplining effect on managers’ actions. Recent computing advancements have enabled technology companies to collect real-time, granular indicators of fundamentals to sell to investment professionals. These data include consumer transactions and satellite images. The introduction of these data increases price informativeness through decreased information acquisition costs, particularly in firms in which sophisticated investors have higher incentives to uncover information. I document two effects on managers. First, managers reduce their opportunistic trading. Second, investment efficiency increases, consistent with price informativeness improving managers’ incentives to invest and divest efficiently.

Keywords: Price Informativeness, Insider Trading, Investment, Institutional Investors, Corporate Governance, Big Data, Technology

JEL Classification: G14, G12, G23, G34, O16, M12