Does Firm-specific Information in Stock Prices Guide Capital Allocation?

Artyom Durnev, Randall Morck, Bernard Yeung

NBER Working Paper No. 8093
Issued in January 2001
NBER Program(s):   AP   CF

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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