Strategic Information Revelation and Capital Allocation

It is commonly believed that stock prices help firms' managers make more efficient real investment decisions, because they aggregate information about fundamentals that is not otherwise known to managers. This paper identifies a limitation to...

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Bibliographic Details
Main Author: Pedraza Morales, Alvaro
Format: Policy Research Working Paper
Language:English
en_US
Published: World Bank Group, Washington, DC 2014
Subjects:
GDP
IPO
NPV
Online Access:http://documents.worldbank.org/curated/en/2014/07/19902948/strategic-information-revelation-capital-allocation
http://hdl.handle.net/10986/19380
id okr-10986-19380
recordtype oai_dc
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
language English
en_US
topic ACCESS TO FINANCING
ACCOUNTING
AFFILIATED ORGANIZATIONS
AGENCY PROBLEM
AMORTIZATION
ARBITRAGE
ASSET PRICE
ASSET PRICES
ASSETS RATIO
ASYMMETRIC INFORMATION
BENCHMARK
BOND
BOOK VALUE
BOOK VALUES
BROKERS
BUDGETING
CAPITAL ALLOCATION
CASH FLOWS
CORPORATE BOND
CORPORATE INSIDERS
CORPORATE INVESTMENT
CREDIT RATING
CREDIT SPREADS
DEMAND FUNCTION
DEVELOPMENT POLICY
DISCLOSURE
ECONOMIES OF SCALE
ELASTICITY
ELASTICITY OF SUPPLY
EMERGING MARKETS
EQUILIBRIUM
EQUILIBRIUM PRICE
EQUITY INVESTORS
EXOGENOUS SUPPLY
EXPECTED VALUE
EXPENDITURES
FAIR
FEDERAL RESERVE
FEDERAL RESERVE BANK
FINANCIAL MARKETS
FINANCIAL STUDIES
FINANCIAL SYSTEMS
FIXED ASSETS
FIXED INVESTMENT
FORECASTS
FUNCTIONAL FORMS
FUTURE CASH FLOW
FUTURE EARNINGS
GDP
IMPERFECT COMPETITION
INCOME
INDIVIDUAL FIRMS
INDIVIDUAL INVESTORS
INFLATION
INFORMED TRADER
INFORMED TRADERS
INSIDER TRADING
INSTITUTIONAL INVESTORS
INTEREST RATES
INTERNATIONAL BANK
INTERNATIONAL SETTLEMENTS
INVESTING
INVESTMENT CHOICE
INVESTMENT DECISION
INVESTMENT DECISIONS
INVESTMENT OPPORTUNITY
INVESTMENT PROJECTS
INVESTMENT RATE
INVESTMENT RETURN
INVESTMENT STRATEGY
IPO
LIQUIDITY
MACROECONOMIC VARIABLES
MARKET COMPETITION
MARKET DATA
MARKET EFFICIENCY
MARKET INDEX
MARKET INFORMATION
MARKET PARTICIPANT
MARKET PARTICIPANTS
MARKET POWER
MARKET PRICES
MARKET STOCK
MARKET VALUE
NASH EQUILIBRIUM
NEW PRODUCTS
NPV
OPEN MARKET
OPTIMAL INVESTMENT
OPTIMIZATION
OUTPUT
PERFECT INFORMATION
POLITICAL ECONOMY
PRICE ADJUSTMENT
PRICE EFFECT
PRICE MOVEMENTS
PRIVATE EQUITY
PRIVATE EQUITY INVESTOR
PRIVATE SECTOR DEVELOPMENT
PRODUCT MARKET
PROFIT MAXIMIZATION
PROFIT MAXIMIZING
PROFITABILITY
PUBLIC EQUITY
REGULATORS
RETURN
RETURNS
RISK NEUTRAL
SALES
SECONDARY MARKET
SECONDARY MARKETS
SECURITIES
SECURITIES MARKET
SHARE PRICE
SHARE PRICES
SHARES OUTSTANDING
SHORT SELLING
SPECULATOR
SPECULATORS
SPREAD
STOCK MARKET
STOCK MARKETS
STOCK PRICE
STOCK PRICES
STOCK RETURN
STOCK RETURNS
STOCKS
SUPPLY CURVE
SUPPLY SHOCK
SYNCHRONOUS STOCK PRICE MOVEMENTS
TRADES
TRADING ACTIVITY
TRADING COST
TRADING COSTS
TRADING VOLUME
UNEMPLOYMENT
UNINFORMED TRADERS
VALUATION
VALUATIONS
VALUE OF ASSETS
VOLATILITY
spellingShingle ACCESS TO FINANCING
ACCOUNTING
AFFILIATED ORGANIZATIONS
AGENCY PROBLEM
AMORTIZATION
ARBITRAGE
ASSET PRICE
ASSET PRICES
ASSETS RATIO
ASYMMETRIC INFORMATION
BENCHMARK
BOND
BOOK VALUE
BOOK VALUES
BROKERS
BUDGETING
CAPITAL ALLOCATION
CASH FLOWS
CORPORATE BOND
CORPORATE INSIDERS
CORPORATE INVESTMENT
CREDIT RATING
CREDIT SPREADS
DEMAND FUNCTION
DEVELOPMENT POLICY
DISCLOSURE
ECONOMIES OF SCALE
ELASTICITY
ELASTICITY OF SUPPLY
EMERGING MARKETS
EQUILIBRIUM
EQUILIBRIUM PRICE
EQUITY INVESTORS
EXOGENOUS SUPPLY
EXPECTED VALUE
EXPENDITURES
FAIR
FEDERAL RESERVE
FEDERAL RESERVE BANK
FINANCIAL MARKETS
FINANCIAL STUDIES
FINANCIAL SYSTEMS
FIXED ASSETS
FIXED INVESTMENT
FORECASTS
FUNCTIONAL FORMS
FUTURE CASH FLOW
FUTURE EARNINGS
GDP
IMPERFECT COMPETITION
INCOME
INDIVIDUAL FIRMS
INDIVIDUAL INVESTORS
INFLATION
INFORMED TRADER
INFORMED TRADERS
INSIDER TRADING
INSTITUTIONAL INVESTORS
INTEREST RATES
INTERNATIONAL BANK
INTERNATIONAL SETTLEMENTS
INVESTING
INVESTMENT CHOICE
INVESTMENT DECISION
INVESTMENT DECISIONS
INVESTMENT OPPORTUNITY
INVESTMENT PROJECTS
INVESTMENT RATE
INVESTMENT RETURN
INVESTMENT STRATEGY
IPO
LIQUIDITY
MACROECONOMIC VARIABLES
MARKET COMPETITION
MARKET DATA
MARKET EFFICIENCY
MARKET INDEX
MARKET INFORMATION
MARKET PARTICIPANT
MARKET PARTICIPANTS
MARKET POWER
MARKET PRICES
MARKET STOCK
MARKET VALUE
NASH EQUILIBRIUM
NEW PRODUCTS
NPV
OPEN MARKET
OPTIMAL INVESTMENT
OPTIMIZATION
OUTPUT
PERFECT INFORMATION
POLITICAL ECONOMY
PRICE ADJUSTMENT
PRICE EFFECT
PRICE MOVEMENTS
PRIVATE EQUITY
PRIVATE EQUITY INVESTOR
PRIVATE SECTOR DEVELOPMENT
PRODUCT MARKET
PROFIT MAXIMIZATION
PROFIT MAXIMIZING
PROFITABILITY
PUBLIC EQUITY
REGULATORS
RETURN
RETURNS
RISK NEUTRAL
SALES
SECONDARY MARKET
SECONDARY MARKETS
SECURITIES
SECURITIES MARKET
SHARE PRICE
SHARE PRICES
SHARES OUTSTANDING
SHORT SELLING
SPECULATOR
SPECULATORS
SPREAD
STOCK MARKET
STOCK MARKETS
STOCK PRICE
STOCK PRICES
STOCK RETURN
STOCK RETURNS
STOCKS
SUPPLY CURVE
SUPPLY SHOCK
SYNCHRONOUS STOCK PRICE MOVEMENTS
TRADES
TRADING ACTIVITY
TRADING COST
TRADING COSTS
TRADING VOLUME
UNEMPLOYMENT
UNINFORMED TRADERS
VALUATION
VALUATIONS
VALUE OF ASSETS
VOLATILITY
Pedraza Morales, Alvaro
Strategic Information Revelation and Capital Allocation
relation Policy Research Working Paper;No. 6995
description It is commonly believed that stock prices help firms' managers make more efficient real investment decisions, because they aggregate information about fundamentals that is not otherwise known to managers. This paper identifies a limitation to this view. It shows that if informed traders internalize that firms use prices as a signal, stock price informativeness depends on the quality of managers' prior information. In particular, managers with low quality information would like to learn about their own fundamentals by relying on the information aggregated in the stock price. However, in this case, the profitability of trading falls for informed speculators, who therefore reduce their trading volume, reducing the informativeness of prices. As a result, stock prices are not as useful in guiding capital toward its most productive use, leading to inefficient investment decisions. Using a sample of U.S. publicly traded companies between 1990 and 2010, the paper documents a positive correlation between the quality of managerial information and stock price informativeness. Contrary to the conventional view that less informed managers should rely more on stock prices when making investment decisions, the author finds no differences in the sensitivity of investment to stock prices for different levels of managerial information. The evidence suggests that while firms do learn from prices, the learning channel and its effects on real investment are limited.
format Publications & Research :: Policy Research Working Paper
author Pedraza Morales, Alvaro
author_facet Pedraza Morales, Alvaro
author_sort Pedraza Morales, Alvaro
title Strategic Information Revelation and Capital Allocation
title_short Strategic Information Revelation and Capital Allocation
title_full Strategic Information Revelation and Capital Allocation
title_fullStr Strategic Information Revelation and Capital Allocation
title_full_unstemmed Strategic Information Revelation and Capital Allocation
title_sort strategic information revelation and capital allocation
publisher World Bank Group, Washington, DC
publishDate 2014
url http://documents.worldbank.org/curated/en/2014/07/19902948/strategic-information-revelation-capital-allocation
http://hdl.handle.net/10986/19380
_version_ 1764443817588555776
spelling okr-10986-193802021-04-23T14:03:52Z Strategic Information Revelation and Capital Allocation Pedraza Morales, Alvaro ACCESS TO FINANCING ACCOUNTING AFFILIATED ORGANIZATIONS AGENCY PROBLEM AMORTIZATION ARBITRAGE ASSET PRICE ASSET PRICES ASSETS RATIO ASYMMETRIC INFORMATION BENCHMARK BOND BOOK VALUE BOOK VALUES BROKERS BUDGETING CAPITAL ALLOCATION CASH FLOWS CORPORATE BOND CORPORATE INSIDERS CORPORATE INVESTMENT CREDIT RATING CREDIT SPREADS DEMAND FUNCTION DEVELOPMENT POLICY DISCLOSURE ECONOMIES OF SCALE ELASTICITY ELASTICITY OF SUPPLY EMERGING MARKETS EQUILIBRIUM EQUILIBRIUM PRICE EQUITY INVESTORS EXOGENOUS SUPPLY EXPECTED VALUE EXPENDITURES FAIR FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL MARKETS FINANCIAL STUDIES FINANCIAL SYSTEMS FIXED ASSETS FIXED INVESTMENT FORECASTS FUNCTIONAL FORMS FUTURE CASH FLOW FUTURE EARNINGS GDP IMPERFECT COMPETITION INCOME INDIVIDUAL FIRMS INDIVIDUAL INVESTORS INFLATION INFORMED TRADER INFORMED TRADERS INSIDER TRADING INSTITUTIONAL INVESTORS INTEREST RATES INTERNATIONAL BANK INTERNATIONAL SETTLEMENTS INVESTING INVESTMENT CHOICE INVESTMENT DECISION INVESTMENT DECISIONS INVESTMENT OPPORTUNITY INVESTMENT PROJECTS INVESTMENT RATE INVESTMENT RETURN INVESTMENT STRATEGY IPO LIQUIDITY MACROECONOMIC VARIABLES MARKET COMPETITION MARKET DATA MARKET EFFICIENCY MARKET INDEX MARKET INFORMATION MARKET PARTICIPANT MARKET PARTICIPANTS MARKET POWER MARKET PRICES MARKET STOCK MARKET VALUE NASH EQUILIBRIUM NEW PRODUCTS NPV OPEN MARKET OPTIMAL INVESTMENT OPTIMIZATION OUTPUT PERFECT INFORMATION POLITICAL ECONOMY PRICE ADJUSTMENT PRICE EFFECT PRICE MOVEMENTS PRIVATE EQUITY PRIVATE EQUITY INVESTOR PRIVATE SECTOR DEVELOPMENT PRODUCT MARKET PROFIT MAXIMIZATION PROFIT MAXIMIZING PROFITABILITY PUBLIC EQUITY REGULATORS RETURN RETURNS RISK NEUTRAL SALES SECONDARY MARKET SECONDARY MARKETS SECURITIES SECURITIES MARKET SHARE PRICE SHARE PRICES SHARES OUTSTANDING SHORT SELLING SPECULATOR SPECULATORS SPREAD STOCK MARKET STOCK MARKETS STOCK PRICE STOCK PRICES STOCK RETURN STOCK RETURNS STOCKS SUPPLY CURVE SUPPLY SHOCK SYNCHRONOUS STOCK PRICE MOVEMENTS TRADES TRADING ACTIVITY TRADING COST TRADING COSTS TRADING VOLUME UNEMPLOYMENT UNINFORMED TRADERS VALUATION VALUATIONS VALUE OF ASSETS VOLATILITY It is commonly believed that stock prices help firms' managers make more efficient real investment decisions, because they aggregate information about fundamentals that is not otherwise known to managers. This paper identifies a limitation to this view. It shows that if informed traders internalize that firms use prices as a signal, stock price informativeness depends on the quality of managers' prior information. In particular, managers with low quality information would like to learn about their own fundamentals by relying on the information aggregated in the stock price. However, in this case, the profitability of trading falls for informed speculators, who therefore reduce their trading volume, reducing the informativeness of prices. As a result, stock prices are not as useful in guiding capital toward its most productive use, leading to inefficient investment decisions. Using a sample of U.S. publicly traded companies between 1990 and 2010, the paper documents a positive correlation between the quality of managerial information and stock price informativeness. Contrary to the conventional view that less informed managers should rely more on stock prices when making investment decisions, the author finds no differences in the sensitivity of investment to stock prices for different levels of managerial information. The evidence suggests that while firms do learn from prices, the learning channel and its effects on real investment are limited. 2014-08-15T18:40:12Z 2014-08-15T18:40:12Z 2014-07 http://documents.worldbank.org/curated/en/2014/07/19902948/strategic-information-revelation-capital-allocation http://hdl.handle.net/10986/19380 English en_US Policy Research Working Paper;No. 6995 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Group, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research