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Stock price informativeness and managerial inefficiency

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  • Xu, Liang

Abstract

This paper investigates whether more informative stock prices lead to managers making more efficient corporate decisions. I find a negative relationship between probability of informed trading (PIN) and firm value shortfalls, which capture managerial inefficiency. This relationship is robust to controlling for endogeneity issues and using alternative measures. Moreover, I show that stock price informativeness reduces managerial inefficiency by revealing new information to guide managers’ decisions and by enhancing corporate governance mechanisms that incentivize managers to make value-maximization decisions. This paper adds firm-level evidence to studies on the connection between stock market (informationally) efficiency and real economy efficiency.

Suggested Citation

  • Xu, Liang, 2021. "Stock price informativeness and managerial inefficiency," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 348-364.
    • Handle: RePEc:eee:reveco:v:74:y:2021:i:c:p:348-364
    DOI: 10.1016/j.iref.2021.03.006
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    Cited by:

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    2. Xie, Tao & Li, Yanan, 2023. "Political connections, institutional environment and informativeness of stock price," Finance Research Letters, Elsevier, vol. 55(PA).
    3. Cosmin Octavian Cepoi & Victor Dragotă & Ruxandra Trifan & Andreea Iordache, 2023. "Probability of informed trading during the COVID-19 pandemic: the case of the Romanian stock market," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-27, December.

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    More about this item

    Keywords

    Stock price informativeness; Managerial inefficiency; Firm value shortfalls; Learning hypothesis; Contracting hypothesis;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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