The source of information in prices and investment-price sensitivity
Journal
Journal of Financial Economics
Subject
Finance
Publishing details
Authors / Editors
Edmans A;Jayaraman S;Schneemeier J
Biographies
Publication Year
2017
Abstract
This paper shows that real decisions depend not only on the total amount of information in prices, but the source of this information -- a manager learns from prices when they contain information not possessed by him. We use the staggered enforcement of insider trading laws across 27 countries as a shock to the source of information that leaves total information unchanged: enforcement reduces (increases) managers' (outsiders') contribution to the stock price. Consistent with the predictions of our theoretical model, enforcement increases investment-q sensitivity, even when controlling for total price informativeness. The effect is larger in industries where learning is likely to be stronger, and in emerging countries where outsider information acquisition rises most post-enforcement. Enforcement does not increase the sensitivity of investment to cash flow, a non-price measure of investment opportunities. These findings suggest that extant measures of price efficiency should be rethought when evaluating real efficiency.
Keywords
Financial Efficiency; Real efficiency; Real Eeffects of financial markets; Insider trading
Publication Notes
Published online 04/07/2017 as free-to-read (ERC grant funded for Gold OA)
Available on ECCH
No