Observable Versus Unobservable Information Acquisition: The Differential Effect on Information Acquisition and Market Quality

ABSTRACT

Historically, investors' information acquisition has been unobservable, but recent regulatory changes have made these activities visible to other market participants. Using this shift, we provide empirical evidence that investors strategically reduce their information acquisition when they expect their actions to be observed. This response aligns with market microstructure theory: investors aim to avoid leaving observable research traces that other stakeholders can exploit to erode investors' informational advantage and profits. These findings indicate that transparency‐oriented regulations can inadvertently discourage information production, weaken firms' information environments, and undermine market efficiency that these rules are intended to promote.