Discussion paper

DP15744 Is Hard and Soft Information Substitutable? Evidence from the Lockdowns

We study the degree of information substitutability in the nancial markets; in particular, we
focus on the COVID pandemic that has made people's interaction far more dicult. Exploit-
ing both the cross-sectional and time-series variations induced by lockdowns in the United
States, we investigate how the diculty/inability to use soft information has prompted a
switch to hard information, and further the implication of such a switch on fund perfor-
mance. We show that lockdowns reduce fund investment in proximate stocks and generate a
portfolio rebalancing towards distant stocks. The rebalancing has negative implications on
fund performance by reducing fund raw (excess) return of 0.76% (0.29%) per month during
the lockdown, suggesting that soft and hard information is not easily substitutable. Soft
information originates with geographic proximity and human interactions, mostly in cafe,
restaurants, bars, and tness centers. The most a ected funds are those more likely to rely
on soft information which use a larger management team or sub-advisors. Our ndings not
only document the nature of soft information and its degree of substitutability with hard
information, but also show that soft information requires \person-to-person" meetings and
thus diminishes when such meetings are discontinued or hampered. This suggests that the
\New World" based on Zoom/Skype/Team and remote connections will have direct negative
implications in terms of the ability of collecting soft information and therefore to a ect fund


Massa, M and J Bai (2021), ‘DP15744 Is Hard and Soft Information Substitutable? Evidence from the Lockdowns‘, CEPR Discussion Paper No. 15744. CEPR Press, Paris & London. https://cepr.org/publications/dp15744