Working Paper: NBER ID: w8093
Authors: Artyom Durnev; Randall Morck; Bernard Yeung
Abstract: 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).
Keywords: firm-specific information; capital allocation; stock prices; external financing; malinvestment
JEL Codes: G12; G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased firm-specific stock price variability (G32) | Greater external financing (G19) |
| Greater firm-specific stock price variability (G19) | Lower malinvestment (E22) |