Algorithmic trading and investment-to-price sensitivity

Does the increased prevalence of algorithmic trading (AT) produce real economic effects? We find that AT contributes to managerial learning by fostering the production of new information, thereby increasing firms’ investment-to-price sensitivity. We show that AT improves managers‘ earnings forecast accuracy and encourages information acquisition of market participants, and the impact of AT on investment-to-price sensitivity is stronger for stocks with greater managerial learning, suggesting that AT increases the revelatory efficiency of stock prices. While, in aggregate, AT contributes positively to managerial learning, we also show that a subset of AT, namely opportunistic AT, is harmful to managerial learning.