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Diane Publishing Books
Have Financial Markets Become More Informative?
Jennie Bai (au); Thomas Philippon (au); Alexi Savov (au)
The finance industry has grown. Financial markets have become more liquid. Information technology has improved. But have prices become more informative? Using stock and bond prices to forecast earnings, the authors find that the information content of market prices has not increased since 1960. The magnitude of earnings surprises, however, has increased. A baseline model predicts that as the efficiency of information production increases, prices become more disperse and covary more strongly with future earnings. The forecastable component of earnings improves capital allocation and serves as a direct measure of welfare. The authors find that this measure has remained stable. A model with endogenous information acquisition predicts that an increase in fundamental uncertainty also increases informativeness as the incentive to produce information grows. Uncertainty has indeed increased outside of the S&P 500, but price informativeness has not. Figures and tables. This is a print on demand report.
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