Stock Price Informativeness, Analyst Coverage and Economic Growth: Evidence from Emerging Markets

Abstract

This paper extends the output growth model tested by Levine and Zervos (1998) by including a channel for capital allocation efficiency proxied by stock price informativeness. Using a sample of 59 countries, this study finds that stock price informativeness as measured by firm-specific return variation is positively associated with output growth after controlling for variables in the Levine and Zervos’s (1998) model. We find that stock price informativeness acts as a substitute for stock market liquidity in predicting output growth. These results are consistent with the Roll’s (1988) claim: more information-laden stock prices signal efficient stock markets and, therefore, stronger output growth. We also find that firms in emerging economies covered by more analysts incorporate greater (lesser) systematic-wide (firm-specific) information which impede the role of stock price informativeness on facilitating output growth.

Keywords: Stock price informativeness, Capital allocation efficiency, Firm-specific return variation, Economic growth, Capital Inflows, Ordered probit

JEL Classification: C01, C32, C33, C35, C58, C61, C87, E22, E44, E51, E62, F15, F18, G01, G12, G15, H52, P14, P43