What's in Investors' Information Set?

We exploit a unique dataset to study how the information sets of retail and institutionalinvestors evolve over time and how changes in investors’ information sets relate to stockprice dynamics. Changes in stock following are positively related to future stock returns athorizons shorter than one month but negatively related to stock returns at longer horizons.Stock following also tends to exacerbate the effect of news on returns and volatility anddoes not result in the quicker incorporation of financial information into prices. Overall,our results suggest that stock following—particularly by nonprofessional investors—maydestabilize financial markets.