Is Hard and Soft Information Substitutable? Evidence from the Lockdowns

We study information substitutability in the financial market through a quasi-natural experiment: the pandemic-triggered lockdown that has hampered people's physical interactions hence the ability to collect, process, and transmit soft information. Exploiting the cross-sectional and time-series variations of lockdown, we investigate how the difficulty to use soft information has prompted a switch to hard information and its implication on fund investment, performance, and risk management. We show that lockdown reduces fund investment in proximate stocks and generates a portfolio rebalancing toward distant stocks. The rebalancing negatively impacts fund performance by reducing fund raw (excess) return of an additional 0.76% (0.29%) per month during lockdown, suggesting that soft and hard information is not easily substitutable. Lastly, we show that soft information originates mainly from physical human interactions, primarily in cafes, restaurants, bars, and fitness centers; and the virtual world based on Zoom/Skype/Team fails to substitute physical interactions fully, thus cannot provide sufficient soft information.