Have financial markets become more informative?

Jennie Bai (), Thomas Philippon () and Alexi Savov

No 578, Staff Reports from Federal Reserve Bank of New York

Abstract: 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, we 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. We 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. We find that uncertainty has indeed increased outside of the S&P 500, but price informativeness has not.

Keywords: Stock - Prices; Uncertainty; Prices; Financial markets; Investments; Information technology (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Have financial markets become more informative? (2016)
Working Paper: Have Financial Markets Become More Informative? (2013)
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