Does Firm-Specific Information in Stock Prices Guide Capital Allocation?

67 Pages Posted: 11 Jan 2001

See all articles by Art Durnev

Art Durnev

University of Iowa - Henry B. Tippie College of Business

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Asian Bureau of Finance and Economic Research

Bernard Yin Yeung

National University of Singapore - Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 15, 2001

Abstract

We show that firms in industries in which firm-specific stock price variation is larger use more external financing and allocate capital with greater precision in the sense that their marginal q ratios are closer to one. Greater precision of stock prices in tracking firm fundamentals should alleviate the information asymmetry problem in outside financing and thus reduces its costs. Also, the greater precision should also improve monitoring and the precision in firm investment decision. Thus, our result is consistent with the view that greater firm-specific stock price variation indicates that stock prices are tracking fundamentals more closely, perhaps because of more intense interest on the part of risk arbitrageurs.

Keywords: Capital allocation; Capital budgeting; Corporate investment policy; External financing; Firm-specific variation; Lemons problem; Stock market efficiency; Tobin's q

JEL Classification: G1, G14, G3, G31

Suggested Citation

Durnev, Artyom and Morck, Randall K. and Yeung, Bernard Yin, Does Firm-Specific Information in Stock Prices Guide Capital Allocation? (April 15, 2001). Available at SSRN: https://ssrn.com/abstract=255788 or http://dx.doi.org/10.2139/ssrn.255788

Artyom Durnev

University of Iowa - Henry B. Tippie College of Business ( email )

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Randall K. Morck (Contact Author)

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Bernard Yin Yeung

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