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Does Firm-specific Information in Stock Prices Guide Capital Allocation?

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  • Artyom Durnev
  • Randall Morck
  • Bernard Yeung

Abstract

We show that firms in industries in which firm-specific stock price variation is larger use more external financing and allocate capital with greater precision in the sense that their marginal q ratios are closer to one. According to the Efficient Markets Hypothesis, greater firm-specific stock price variation reflects higher intensity firm-specific information capitalization in stock prices. We propose that higher firm-specific price variation may be an indicator of greater functional-form market efficiency in the sense of Tobin (1982).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8093.

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Date of creation: Jan 2001
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Handle: RePEc:nbr:nberwo:8093

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Cited by:
  1. Beneda, Nancy & Zhang, Yilei, 2009. "Heterogeneous relationship between IPO return and risk across idiosyncratic variance characteristics," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 49(4), pages 1298-1316, November.
  2. Greene, William H. & Hornstein, Abigail S. & White, Lawrence J., 2009. "Multinationals do it better: Evidence on the efficiency of corporations' capital budgeting," Journal of Empirical Finance, Elsevier, Elsevier, vol. 16(5), pages 703-720, December.
  3. Artyom Durnev & Randall Morck & Bernard Yeung, 2001. "Capital Markets and Capital Allocation: Implications for Economies in Transition," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 417, William Davidson Institute at the University of Michigan.
  4. Bernard Yeung & Randall Morck & Daniel Wolfenzon, 2004. "Corporate Governance, Economic Entrenchment and Growth," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 04-21, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Hou, Kewei & Peng, Lin & Xiong, Wei, 2006. "R2 and Price Inefficiency," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2006-23, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  6. Mohsen Bahmani-Oskooee & Shady Kholdy & Ahmad Sohrabian, 2013. "Do MNCs spur financial markets in corrupt host countries?," Journal of Economics and Finance, Springer, Springer, vol. 37(2), pages 308-317, April.

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