Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93638
Authors: 
Bai, Jennie
Philippon, Thomas
Savov, Alexi
Year of Publication: 
2012
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 578
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.
Subjects: 
financial markets
price informativeness
earnings
investment
JEL: 
G10
G14
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.