Product Experience and Stock Price Efficiency
45 Pages Posted: 16 Mar 2017 Last revised: 6 Aug 2017
Date Written: February 12, 2017
We show that product using experience can improve stock price efficiency. Based on U.S consumer expenditure data from 1998 to 2015, we construct a consumption-based proxy for product experience at firm level. We find that investors incorporate both industry and firm specific information into stock price more quickly when they have more experience with relevant firm’s products. This effect is stronger if more individual investors are present. Analyst coverage only enhances price efficiency for non-consumer-goods firms. These results suggest that product experience can help unsophisticated investors to develop recognition and knowledge about firms’ business and to process information more efficiently. With product experience, people may not diligently read analyst reports.
Keywords: product experience, price efficiency, individual investor
JEL Classification: G14, L15, L60
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