TY  - JOUR
AU  - Gorton,Gary B.
AU  - Huang,Lixin
AU  - Kang,Qiang
TI  - The Limitations of Stock Market Efficiency: Price Informativeness and CEO Turnover
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14944
PY  - 2009
Y2  - May 2009
UR  - http://www.nber.org/papers/w14944
L1  - http://www.nber.org/papers/w14944.pdf
N1  - Author contact info:
Gary B. Gorton
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
Fax: 203/432-8931
E-Mail: Gary.Gorton@yale.edu

Lixin Huang
J. Mack Robinson College of Business
Georgia State University
Atlanta, GA 30303
E-Mail: lxhuang@gsu.edu

Qiang Kang
School of Business
University of Miami
Coral Gables, FL 33124-6552
E-Mail: q.kang@miami.edu
AB  - Stock prices are more informative when the information has less social value. Speculators with limited resources making costly (private) information production decisions must decide to produce information about some firms and not others. We show that producing and trading on private information is most profitable in the stocks of firms with poor corporate governance -- precisely because it will not be acted upon -- and less profitable at firms with better corporate governance. To the extent that the information in the stock price is used for disciplining the CEO by the board of directors, the informed trader has a reduced incentive to produce the information in the first place. We test our model using the probability of informed trading (PIN) and the probability of forced CEO turnover in a simultaneous-equation system. The empirical results support the model predictions. Stock prices are efficient, but there is a limit to the disciplining role they can fulfill. We apply the model to evaluate the effects of the Sarbanes-Oxley Act of 2002.
ER  -