The Limitations of Stock Market Efficiency: Price Informativeness and CEO Turnover

Review of Finance, 21(1), 2017, 153-200.

82 Pages Posted: 27 Apr 2009 Last revised: 9 Nov 2021

See all articles by Lixin Huang

Lixin Huang

Georgia State University

Qiang Kang

Florida International University (FIU) - Department of Finance

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2013

Abstract

There is a tenuous link between market efficiency and economic efficiency in that stock prices are more informative when the information has less social value. We investigate this link in the context of CEO turnover. Our theoretical model predicts that, when the board’s monitoring intensity and the informed trader’s information decision are jointly endogenized, stock price informativeness is negatively related to the board’s monitoring effort. Our empirical tests provide supporting evidence for this negative effect. Moreover, using the passage of the Sarbanes-Oxley Act (SOX) as a quasi-natural experiment, we find that SOX, while strengthening corporate governance, has a negative effect on stock price informativeness, especially among firms with complex organizational structures.

Keywords: Price informativeness; Monitoring; CEO turnover; SOX

JEL Classification: D82, G18, G34

Suggested Citation

Huang, Lixin and Kang, Qiang and Gorton, Gary B., The Limitations of Stock Market Efficiency: Price Informativeness and CEO Turnover (February 28, 2013). Review of Finance, 21(1), 2017, 153-200., Available at SSRN: https://ssrn.com/abstract=1395633 or http://dx.doi.org/10.2139/ssrn.1395633

Lixin Huang

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Qiang Kang

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
New haven, CT 06511
United States

HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

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