This essay summarizes an article by Gargano et al. (2017), which documents the usage of the Freedom of Information Act (FOIA) in the stock market. The law enables people and institutions to request information from federal agencies and be entitled to receiving it, which is enforceable in court. There are some restrictions, which are generally related to trade secrets, privacy, national security, and examinations of federal agency-maintained government agencies. However, every document that does not fall into one of these categories must be provided to the submitter of the request, whether they are an American citizen, a foreign national, or an institution.
The information that is gathered by the federal government and can consequently be requested includes potentially valuable knowledge about businesses. Gargano et al. (2017) provide an example of knowing that a pharmaceutical company is receiving FDA warnings or that a bank is under investigation by the SEC. Institutional investors and hedge funds have the processing capabilities to interpret this information, which can often be challenging to decipher for non-specialists, once they receive it. The FOIA enables them to secure this knowledge and obtain an advantage over other investors, making safe choices.
The authors find that this advantage translates into economic success for the institutions that engage in this practice. Obtaining valuable information in times of uncertainty, they can leverage it to generate abnormally high returns. Moreover, they sometimes try to conceal their operations from the rest of the market by filing the request through a third party. These findings confirm the idea that these organizations are using the FOIA to secure an advantage in the market, which only lasts while not every player in it has access to this information. This use of the law was likely not intended, but it is not illegal and presents an insight into how information can affect the stock market.
References
Gargano, A., Rossi, A. G., & Wermers, R. (2017). The Freedom of Information Act and the race toward information acquisition. The Review of Financial Studies, 30(6), 2179-2228. Web.