Mispricing and the Demand for Fundamental Information

Abstract

I provide evidence that investor demand for accounting information intensifies following nonfundamental shocks to prices. Using quasi-exogenous variation in security prices due to forced mutual fund sales, I find that mispricing triggers an increase in the consumption of accounting information, especially among institutional investors. This increase in information consumption subsequently predicts both the speed and extent to which prices return to their pre-shock levels, as well as price informativeness around future earnings events. Taken together, these findings not only demonstrate that mutual fund flow-induced mispricing shapes investors’ information consumption, but also highlight the useful role of accounting information in enhancing the informational efficiency of securities markets following temporary mispricing.