Information Consumption and Asset Pricing

We construct measures of expected information consumption (EIC) to test whether information processing by investors is associated with a risk premium. We show that most expected information processing about individual firms occurs during spillovers, when peer firm or macroeconomic announcements occur. On days when institutions are expected to consume information, stocks earn a significant risk premium (10% annualized) and the CAPM performs better. The positive effect of FOMC announcements on the risk premia for individual stocks is modulated by the expected information consumption by institutional investors. In contrast, expected retail information consumption has little effect on asset prices