Working Paper: NBER ID: w24102
Authors: Benjamin Bennett; Ren Stulz; Zexi Wang
Abstract: We test the hypothesis that greater stock price informativeness (SPI) leads to higher firm-level productivity (TFP). Management, directly or indirectly, learns more from more informative stock prices, so that more informative stock prices should make firms more productive. We find a positive relation between SPI and TFP. The relation is stronger for smaller, younger, riskier, less capital-intensive, and financially-constrained firms. Product market competition and better governance amplify the relation, while diversification weakens it. We address endogeneity concerns with fixed effects, instrumental variables, and the use of brokerage house research department closures and S&P 500 additions as plausibly exogenous events.
Keywords: Stock Price Informativeness; Firm Productivity; Total Factor Productivity
JEL Codes: D22; G14; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| greater stock price informativeness (SPI) (G14) | higher revenues (H27) |
| greater stock price informativeness (SPI) (G14) | lower operating costs (L99) |
| higher revenues (H27) | firm-level productivity (TFP) (D24) |
| lower operating costs (L99) | firm-level productivity (TFP) (D24) |
| product market competition (L13) | stronger relationship between SPI and TFP (C29) |
| better governance (H11) | stronger relationship between SPI and TFP (C29) |
| diversification (G11) | weaker relationship between SPI and TFP (F29) |
| greater stock price informativeness (SPI) (G14) | firm-level productivity (TFP) (D24) |