How Does Benchmarking Affect Market Efficiency? The Role of Learning Technology

Wen Chen, Bo Hu, and Yajun Wang

♦ We study how asset managers’ benchmarking affects market efficiency under two learning technologies: separative and integrative. With integrative learning, investors process portfolio-wide signals, optimizing information allocation across assets instead of focusing on individual ones. Therefore, increased benchmarking on an asset with greater uncertainty can enhance its price informativeness as investors direct more attention to it. This contrasts with the existing results assuming separative learning. Moreover, our study indicates that benchmarking could increase overall market efficiency, with each learning technology presenting distinct implications for asset pricing. These findings emphasize the critical role of learning technology in understanding the effects of benchmarking.