Christina Zhu, of the University of Pennsylvania, in a recent paper, looks at the consequences of Big Data for corporate management.

What “Big Data” means depends on who is talking or writing about it. For economists working within the classic microeconomic framework, it means a drastic fall in the cost of acquiring information. As Zhu observes, in recent years, taking advantage of the new technological landscape, a number of startups have gone into the business of collecting “alternative” data (clickstream info, satellite imagery of the cars in the parking lots of retailers, etc.) and presenting it to actual or potential investors. Those investors now have available to them, though not without expense, a range of information they would never have dreamt of trying to compile as recently as a decade ago: granular and real-time data that does not depend on disclosures through the firm whose stocks or bonds they are considering.

Zhu shows that the consequences vindicate a model developed in the early 1980s, the “noisy rational expectations” (NRE) model. One of the key papers in the development of the model was that of Sanford J. Grossman and Joseph Stiglitz, “On the Impossibility of Informationally Efficient Markets.” Grossman and Stiglitz, writing in the days when clocks had hands and telephones were generally still attached to a wall, wrote that because information is costly, asset prices can never reflect all the information that is publicly available. This implies that there will always be room for players working to take advantage of the inefficiencies, for alpha seekers.

Douglas Diamond and Robert Verrecchia, writing in the same period, discussed how the asset price’s equilibrium serves as a “noisy” aggregation of the total information observed by all traders. There is a lot of static amidst the signals.

Times Have Changed

Zhu is saying: (a) they were right; and (b) times have changed. A decrease in the cost of information acquisition has allowed those new information intermediaries to spread these new types of data, which has, in turn, allowed investors, especially sophisticated investors of the sort most likely to make good use of such intermediaries, and, for example, to anticipate earnings announcements. Thus, as an empirical matter, Zhu says, “price reactions to earnings announcements are muted after alternative data from these data sources” have become available.