Does the Stock Market Make Firms More Productive?

Abstract

Management, directly or indirectly, learns from its firm’s stock price, so that a more informative stock price should make the firm more productive. We show that stock price informativeness increases firm productivity. We predict and confirm that the productivity of smaller and younger firms, better governed firms, more specialized firms, and firms with more competition is more strongly related to the informativeness of their stock price. We address endogeneity concerns with fixed effects, instrumental variables, and the use of brokerage house research department closures and S&P 500 additions as plausibly exogenous events.

Keywords: stock price informativeness, private information, stock market, productivity, governance

JEL Classification: D22, G14, G31