Is Hard and Soft Information Substitutable? Evidence from Lockdown
We study information substitutability in the financial market through a quasi-natural experiment: the pandemic-triggered lockdown that has hampered people's physical interactions hence the ability to collect, process, and transmit soft information. Exploiting the cross- sectional and time-series variations of lockdown, we investigate how the difficulty to use soft information has prompted a switch to hard information and its implication on fund investment, performance, and risk management. We show that lockdown reduces fund investment in proximate stocks and generates a portfolio rebalancing toward distant stocks. The re- balancing negatively impacts fund performance by reducing fund raw (excess) return of an additional 0.76% (0.29%) per month during lockdown, suggesting that soft and hard information is not easily substitutable. Lastly, we show that soft information originates mainly from physical human interactions, primarily in cafés, restaurants, bars, and fitness centers; and the virtual world based on Zoom/Skype/Team fails to substitute physical interactions fully, thus cannot provide sufficient soft information.
We thank Fernando Anjos, Turan Bali, David McLean, Chris Parsons, Johan Sulaeman, Laura Veldkamp, and seminar participants at NBER Asset Pricing Spring conference (2021), ABFER 8th annual conference (2021), the Shanghai Financial Forefront Symposium (2021), FTSE/Russell World Investment Forum, University of Utah, NOVA School of Business and Economics, Nanyang Technological University, and Georgetown University for helpful comments. Tuo Wu provides excellent research assistance. All errors remain our responsibility. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.