Have Financial Markets Become More Informative?

70 Pages Posted: 29 May 2014 Last revised: 29 May 2021

See all articles by Jennie Bai

Jennie Bai

Georgetown University - Department of Finance; National Bureau of Economic Research (NBER)

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)

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Date Written: December 2013

Abstract

The finance industry has grown, financial markets have become more liquid, information technology has undergone a revolution. But have 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 traded options, 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.

Suggested Citation

Bai, Jennie and Philippon, Thomas and Savov, Alexi, Have Financial Markets Become More Informative? (December 2013). NBER Working Paper No. w19728, Available at SSRN: https://ssrn.com/abstract=2443231

Jennie Bai (Contact Author)

Georgetown University - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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Thomas Philippon

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

Stern School of Business
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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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