The Freedom of Information Act and the Race Towards Information Acquisition

We document a previously unknown source of information exploited by sophisticated institutional investors: the Freedom of Information Act, a law that allows for the full or partial disclosure of previously unreleased information and documents controlled by the United States government. Through our own FOIA requests, we uncover the identities of several large institutional investors, chiefly hedge funds, that routinely request value-relevant information from the Food and Drug Administration. We first provide a detailed analysis of how FOIA requests are generated, the kind of information commonly requested by institutional investors and its costs. We then document that the target of FOIA requests are large firms that experience periods of low profitability and high stock price volatility. Finally, we show that FOIA requests allow institutional investors to generate abnormal portfolio returns and provide evidence suggesting that the FOIA information is not systematically known to other investors in the marketplace.