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

49 Pages Posted: 27 Apr 2009 Last revised: 7 Mar 2013

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

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 theoretically and empirically investigate this link in the context of CEO turnover. Our theoretical model predicts that, although the board of directors relies on the stock market information to make CEO turnover decisions, stock price informativeness is negatively related to the board’s monitoring effort. Our empirical tests support the model predictions. In addition, using the passage of the Sarbanes-Oxley Act as a quasi-natural experiment, we find that the legislation has a negative impact on stock price informativeness.

Keywords: Stock market efficiency, economic efficiency, CEO turnover,

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). 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)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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