Here’s an Idea: Information Inefficiencies Leading to Know-How Sharing among Competitors to Create a Market

• In Event: 225 - Regular Session. Economic Sociology: Infrastructures for Financial Markets

Abstract

Knowledge (or know-how) sharing among competitors has been found to occur in the economy with surprising frequency. Previous research has highlighted certain conditions that help facilitate sharing among competitors: (1) the industry is slow moving, (2) there is measured reciprocity between the sharing agents, and (3) there is a preexisting relationship between the sharing agents. Recently, in the investment industry, there has been a proliferation of platforms with the goal of promoting the sharing of know-how among investment professionals. Surprisingly, even in the absence of these conditions, these investors have been willing to participate. I hypothesize that this sharing is sustained due to informational inefficiencies that exist in the financial markets, a failure of the efficient-market hypothesis. By sharing their know-how regarding informationally inefficient stocks, these investors can create a market. In other words, given their capital constraints, investors share their know-how to convince other like-minded investors to take a similar position. Using a unique data set of investment recommendations shared among investment professionals on an online platform, this study exploits an exogenous shock to the sharing structure to test this hypothesis. When given the option of sharing more or less know-how about a given investment, the investors under study opt to share more extensively when discussing securities that are less informationally efficient.

Author

• Tristan L. Botelho, Massachusetts Institute of Technology