Stock price informativeness and managerial inefficiency
2021, International Review of Economics and Finance, 74, pp.348-364
Abstract
This paper investigates whether more informative stock prices lead to managers making more efficient corporate decisions. I find a negative relationship between probability of informed trading (PIN) and firm value shortfalls, which capture managerial inefficiency. This relationship is robust to controlling for endogeneity issues and using alternative measures. Moreover, I show that stock price informativeness reduces managerial inefficiency by revealing new information to guide managers’ decisions and by enhancing corporate governance mechanisms that incentivize managers to make value-maximization decisions. This paper adds firm-level evidence to studies on the connection between stock market (informationally) efficiency and real economy efficiency.