Have Financial Markets Become More Informative?

70 Pages Posted: 13 Nov 2012 Last revised: 19 Feb 2017

See all articles by Jennie Bai

Jennie Bai

Georgetown University - Department of Finance

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Alexi Savov

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 25, 2015

Abstract

The finance industry has grown, financial markets have become more liquid, information technology has been revolutionized. But have financial market prices become more informative? We derive a welfare-based measure of price informativeness: the predicted variation of future cash flows from current market prices. Since 1960, price informativeness has increased at longer horizons (three to five years). The increase is concentrated among firms with greater institutional ownership and share turnover, firms with options trading, and growth firms. Prices have also become a stronger predictor of investment, and investment a stronger predictor of cash flows. These results suggest increased revelatory price efficiency.

Keywords: price informativeness, economic growth, investment, revelatory price efficiency, forecasting price efficiency

JEL Classification: E2, G1, N2

Suggested Citation

Bai, Jennie and Philippon, Thomas and Savov, Alexi, Have Financial Markets Become More Informative? (September 25, 2015). Journal of Financial Economics (JFE), Vol. 122, No. 3, 2016. Available at SSRN: https://ssrn.com/abstract=2175112 or http://dx.doi.org/10.2139/ssrn.2175112

Jennie Bai (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States

HOME PAGE: http://www.jenniebai.com

Thomas Philippon

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alexi Savov

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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