The Freedom of Information Act and the Race Toward Information Acquisition

Antonio Gargano · Alberto G. P. Rossi · Russ R. Wermers

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Financial Markets and Investment Strategies Corporate Finance and Governance Auditing, Earnings Management, Governance

Abstract

We document a little-known source of information exploited by sophisticated institutional investors: the Freedom of Information Act (FOIA), a law that allows for the disclosure of previously unreleased information by the U.S. Government. Through FOIA requests, we identify several sophisticated institutional investors, chiefly hedge funds, that request information from the FDA. We explore the type of information commonly requested by funds and the types of firms that are targets of FDA-FOIA requests and show that FOIA requests allow these investors to generate abnormal returns. Thus, we illustrate a detailed mechanism through which costly information becomes incorporated into market prices. Received April 15, 2015; editorial decision April 16, 2016 by Editor Itay Goldstein.

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1998Law and Finance 1997A Survey of Corporate Governance 1980On the Impossibility of Informationally Efficient Markets 2007Giving Content to Investor Sentiment: The Role of Media in the Stock Market 1980On the Impossibility of Informationally Efficient Markets 2011In Search of Attention 1997Measuring Mutual Fund Performance with Characteristic‐Based Benchmarks 1988Herd Behavior and Investment

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2018Disaggregated Sales and Stock Returns 2020Big data and algorithmic trading against periodic and tangible asset reporting: The need for U-XBRL 2020Does the Freedom of Information Act Foil the Securities and Exchange Commission’s Intent to Keep Investigations Confidential?

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