Big Data as a Governance Mechanism

This study empirically investigates two effects of the availability of alternative data: stock price efficiency and its disciplining effect on managers’ actions. Recent advancements in cloud computing, data collection, and machine learning have enabled technology companies to collect real-time, granular indicators of fundamentals to be sold to investment professionals. These data include consumer transactions and satellite images. I find that the introduction of these data increases price efficiency through decreased information acquisition costs. In addition, the increased information content about future earnings contained in price affects managerial actions: I find that when alternative data become available, managers reduce their rent extraction through personal trading. These results are consistent with managers having less of an opportunity to trade profitably on their private information about future earnings because this information is reflected in prices sooner and to a greater extent. Furthermore, I find that investment efficiency, measured in various ways, increases after alternative data become available, consistent with price efficiency improving managers’ incentives to invest and divest efficiently. My study informs academics, practitioners, and regulators about the impacts of reduced information acquisition costs for a group of sophisticated investors.