The invisibility of information prevents direct investigation of information-based industries, such as financial services. To surmount this obstacle, we develop a model that uses an observable variable – the state of the business cycle – to predict information choices. Information choices, in turn, predict aggregate investment patterns. Because the theory begins and ends with observable variables, we can test it, using data on the portfolios and profits of actively managed mutual funds. The results suggest that some, but not all, fund managers process information in a value-maximizing way for their clients and that these skilled managers outperform others
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