Have Financial Markets Become More Informative?

The finance industry has grown. Financial markets have become more liquid. But have prices become more informative? We use stock and bond prices to forecast earnings and find that the information content of market prices has not increased since 1960. The magnitude of earnings surprises has increased. A baseline model predicts that as the efficiency of information production increases, prices become more disperse and covary more strongly with future earnings. The predictable component of earnings improves capital allocation and serves as a direct measure of welfare. We nd that this measure has remained stable. A model with endogenous information acquisition predicts that an increase in fundamental uncertainty also increases informativeness as the incentive to produce information grows. We find that uncertainty has indeed increased outside of the S&P 500, but price informativeness has not. Prices have become stronger predictors of R&D investment.