Noisy Stock Prices and Capital Allocation Efficiency

42 Pages Posted: 20 Jan 2022

See all articles by Jonathan Brogaard

Jonathan Brogaard

University of Utah - David Eccles School of Business

Huong Nguyen

Faculty of Finance, University of Economics, The University of Danang, Vietnam

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Date Written: January 9, 2022

Abstract

We examine the real effects of stock market efficiency by analyzing how noise in stock prices affects the efficiency of capital allocation. Using data from 42 countries and a long time-series, we find that the efficiency of capital allocation across firms (the sensitivity of corporate investment to growth opportunities) and across industries (the elasticity of industry investment to value added) declines with the amount of noise in stock prices. We also find that the effect of noise is incremental to the amount of information in prices and of a similar magnitude, highlighting the importance of secondary market quality.

Keywords: capital allocation, investment-to-Q sensitivity, investment-to-value-added elasticity, informational efficiency

JEL Classification: G14, G15, G31, D92

Suggested Citation

Brogaard, Jonathan and Nguyen, Huong and Putnins, Talis J., Noisy Stock Prices and Capital Allocation Efficiency (January 9, 2022). Available at SSRN: https://ssrn.com/abstract=4013091 or http://dx.doi.org/10.2139/ssrn.4013091

Jonathan Brogaard

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
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HOME PAGE: http://www.jonathanbrogaard.com

Huong Nguyen

Faculty of Finance, University of Economics, The University of Danang, Vietnam ( email )

71 Ngu Hanh Son Street
Danang
Vietnam

Talis J. Putnins (Contact Author)

University of Technology Sydney (UTS) ( email )

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Sydney
Australia
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Stockholm School of Economics, Riga ( email )

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Latvia
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