Have Financial Markets Become More Informative?
70 Pages Posted: 13 Nov 2012 Last revised: 19 Feb 2017
Date Written: September 25, 2015
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
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