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...
Main Author: | |
---|---|
Format: | Policy Research Working Paper |
Language: | English en_US |
Published: |
World Bank Group, Washington, DC
2014
|
Subjects: | |
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 |