Have Financial Markets Become More Informative?
Georgetown University - Department of Finance
New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)
New York University (NYU) - Department of Finance
August 22, 2013
The finance industry has grown. Financial markets have become more liquid. Information technology has been revolutionized. Have market 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. We use a model with information acquisition and investment to link financial development, price informativeness, and investment. As information costs fall, the predictable component of future earnings should rise and hence improve capital allocation and enhance welfare. We find that this component has remained stable in the data. Our model also allows us to decompose price informativeness into two components, one produced in markets, the other reflected by markets. Both are unchanged. Prices have become stronger predictors of R&D investment, but this has not translated into stronger earnings predictability.
Number of Pages in PDF File: 70
Keywords: price informativeness, financial markets, real efficiency, earnings, investment
JEL Classification: G12, G14working papers series
Date posted: March 17, 2012 ; Last revised: August 22, 2013
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