Have Financial Markets Become More Informative?
The finance industry has grown, financial markets have become more liquid, information technology has undergone a revolution. But have market prices become more informative? We derive a welfare-based measure of price informativeness: the predicted variation of future cash flows from current market prices. Since 1960, price informativeness has increased at longer horizons (three to five years). The increase is concentrated among firms with greater institutional ownership and share turnover, firms with traded options, and growth firms. Prices have also become a stronger predictor of investment and investment a stronger predictor of cash flows. These results suggest increased revelatory price efficiency.
The Smith Richardson Foundation provided financial support for this project.We thank Alex Edmans, Itay Goldstein, Harrison Hong, Wei Jiang, Liyan Yang, and Kathy Yuan, and conference and seminar participants at EFA (Cambridge), the NBER Summer Institute Asset Pricing Workshop, the Texas Finance Festival, the Five-Star conference, the Society for Economic Dynamics conference, the Federal Reserve Bank of New York, Columbia University, New York University, Yale University, Southern Methodist University, the University of Texas at Dallas, Georgetown University, and Baruch college at CUNY. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Bai, Jennie & Philippon, Thomas & Savov, Alexi, 2016. "Have financial markets become more informative?," Journal of Financial Economics, Elsevier, vol. 122(3), pages 625-654. citation courtesy of