Does Firm-Specific Information in Stock Prices Guide Capital Allocation?
67 Pages Posted: 19 Jan 2001 Last revised: 30 Jan 2013
Date Written: January 2001
We show that firms in industries in which firm-specific stock price variation is larger use more external financing and allocate capital with greater precision in the sense that their marginal q ratios are closer to one. According to the Efficient Markets Hypothesis, greater firm-specific stock price variation reflects higher intensity firm-specific information capitalization in stock prices. We propose that higher firm-specific price variation may be an indicator of greater functional-form market efficiency in the sense of Tobin (1982).
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