Working Paper: NBER ID: w19728
Authors: Jennie Bai; Thomas Philippon; Alexi Savov
Abstract: 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.
Keywords: price informativeness; financial markets; capital allocation; institutional ownership
JEL Codes: E2; G1; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market prices (P22) | future cash flows (G19) |
| increased price informativeness (D41) | efficient capital allocation (G31) |
| market prices (P22) | investment decisions (G11) |
| price informativeness (G14) | investment decisions (G11) |
| institutional ownership and liquidity (G32) | price informativeness (G14) |