Advanced Search
MyIDEAS: Login to save this paper or follow this series

Have Financial Markets Become More Informative?

Contents:

Author Info

  • Jennie Bai
  • Thomas Philippon
  • Alexi Savov

Abstract

The finance industry has grown, financial markets have become more liquid, and information technology allows arbitrageurs to trade faster than ever. But have market prices then become more informative? We use stock and bond prices to forecast earnings and find that the information content of market prices has not improved since 1960. We use a model with information acquisition and investment to link financial development, price informativeness, and allocational efficiency. As information costs fall, the predictable component of future earnings should rise and hence improve capital allocation and welfare. We find that this component has remained stable over the past 50 years. When we decompose price informativeness into real price efficiency and forecasting price efficiency, we find that both have remained stable.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w19728.pdf
Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19728.

as in new window
Length:
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:nbr:nberwo:19728

Note: AP CF EFG ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  2. Boot, Arnoud W A & Thakor, Anjan V, 1997. "Financial System Architecture," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 10(3), pages 693-733.
  3. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, Annual Reviews, vol. 4(1), pages 339-360, October.
  4. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2010. "Trading Frenzies and Their Impact on Real Investment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7652, C.E.P.R. Discussion Papers.
  5. Khanna, Naveen & Slezak, Steve L & Bradley, Michael, 1994. "Insider Trading, Outside Search, and Resource Allocation: Why Firms and Society May Disagree on Insider Trading Restrictions," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 7(3), pages 575-608.
  6. Greenwood, Jeremy & Jovanovic, Boyan, 1988. "Financial Development, Growth, And The Distribution Of Income," Working Papers, C.V. Starr Center for Applied Economics, New York University 88-12, C.V. Starr Center for Applied Economics, New York University.
  7. Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2002. "When Does the Market Matter? Stock Prices and the Investsment of Equity-Dependent Firms," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1978, Harvard - Institute of Economic Research.
  8. Emre Ozdenoren & Kathy Yuan, 2008. "Feedback Effects and Asset Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 63(4), pages 1939-1975, 08.
  9. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Neglected Risks, Financial Innovation, and Financial Fragility," Working Papers 502, Barcelona Graduate School of Economics.
  10. Stewart Mayhew & Vassil Mihov, 2004. "How Do Exchanges Select Stocks for Option Listing?," Journal of Finance, American Finance Association, American Finance Association, vol. 59(1), pages 447-471, 02.
  11. Simon Gilchrist & Egon Zakrajsek, 2007. "Investment and the Cost of Capital: New Evidence from the Corporate Bond Market," NBER Working Papers 13174, National Bureau of Economic Research, Inc.
  12. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, American Finance Association, vol. 25(2), pages 383-417, May.
  14. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
  15. Davidson, Malcolm & Gorton, Gary B, 1995. "Stock Market Efficiency and Economic Efficiency: Is There a Connection?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1261, C.E.P.R. Discussion Papers.
  16. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
  17. Laura Veldkamp, 2003. "Learning Asymmetries in Real Business Cycles," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 03-21, New York University, Leonard N. Stern School of Business, Department of Economics.
  18. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1315-35, November.
  19. Baljit Sidhu & Tom Smith & Robert E. Whaley & Richard H. Willis, 2008. "Regulation Fair Disclosure and the Cost of Adverse Selection," Journal of Accounting Research, Wiley Blackwell, Wiley Blackwell, vol. 46(3), pages 697-728, 06.
  20. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, American Finance Association, vol. 42(3), pages 483-510, July.
  21. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 31(1-3), pages 3-75, September.
  22. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, American Economic Association, vol. 61(4), pages 561-74, September.
  23. Fulghieri, Paolo & Lukin, Dmitry, 2001. "Information production, dilution costs, and optimal security design," Journal of Financial Economics, Elsevier, Elsevier, vol. 61(1), pages 3-42, July.
  24. Hayne E. Leland., 1990. "Insider Trading: Should It Be Prohibited?," Research Program in Finance Working Papers, University of California at Berkeley RPF-195, University of California at Berkeley.
  25. Michael J. Fishman & Kathleen M. Hagerty, 1992. "Insider Trading and the Efficiency of Stock Prices," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 106-122, Spring.
  26. Thomas Philippon, 2007. "Why Has the U.S. Financial Sector Grown so Much? The Role of Corporate Finance," NBER Working Papers 13405, National Bureau of Economic Research, Inc.
  27. Thomas Philippon & Ariell Reshef, 2009. "Wages and Human Capital in the U.S. Financial Industry: 1909-2006," NBER Working Papers 14644, National Bureau of Economic Research, Inc.
  28. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  29. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 56(1), pages 1-43, 02.
  30. Gintschel, Andreas & Markov, Stanimir, 2004. "The effectiveness of Regulation FD," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 37(3), pages 293-314, September.
  31. Philip Bond & Itay Goldstein & Edward Simpson Prescott, 2010. "Market-Based Corrective Actions," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 23(2), pages 781-820, February.
  32. Avanidhar Subrahmanyam & Sheridan Titman, 1999. "The Going-Public Decision and the Development of Financial Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 54(3), pages 1045-1082, 06.
  33. Eleswarapu, Venkat R. & Thompson, Rex & Venkataraman, Kumar, 2004. "The Impact of Regulation Fair Disclosure: Trading Costs and Information Asymmetry," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 39(02), pages 209-225, June.
  34. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(4), pages 678-709, August.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. All that financial innovation has not lead to more transparency
    by Economic Logician in Economic Logic on 2014-01-15 15:39:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Josef Falkinger, 2014. "In search of economic reality under the veil of financial markets," ECON - Working Papers, Department of Economics - University of Zurich 154, Department of Economics - University of Zurich.
  2. Peter Koudijs, 2013. "The boats that did not sail: Asset Price Volatility and Market Efficiency in a Natural Experiment," NBER Working Papers 18831, National Bureau of Economic Research, Inc.
  3. Thomas Philippon, 2012. "Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," NBER Working Papers 18077, National Bureau of Economic Research, Inc.
  4. Peter Koudijs, 2013. "'Those Who Know Most': Insider Trading in 18th c. Amsterdam," NBER Working Papers 18845, National Bureau of Economic Research, Inc.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:19728. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.