Stock exchange

About: Stock exchange is a research topic. Over the lifetime, 39566 publications have been published within this topic receiving 612044 citations.

Stock Market Efficiency and Economic Efficiency: Is There a Connection?

Abstract: In a capitalist economy, prices serve to equilibrate supply and demand for goods and services, continually changing to reallocate resources to their most efficient uses. However, secondary stock market prices, often viewed as the most "informationally efficient" prices in the economy, have no direct role in the allocation of equity capital since managers have discretion in determining the level of investment. What is the link between stock price informational efficiency and economic efficiency? We present a model of the stock market in which: (i) managers have discretion in making investments and must be given the right incentives; and (ii) stock market traders may have important information that managers do not have about the value of prospective investment opportunities. In equilibrium, information in stock prices will guide investment decisions because managers will be compensated based on informative stock prices in the future. The stock market indirectly guides investment by transferring two kinds of information: information about investment opportunities and information about managers' past decisions. However, because this role is only indirect, the link between price efficiency and economic efficiency is tenuous. We show that stock price efficiency is not sufficient for economic efficiency by showing that the model may have another equilibrium in which prices are strong-form efficient, but investment decisions are suboptimal. We also suggest that stock market efficiency is not necessary for investment efficiency by considering a banking system that can serve as an alternative institution for the efficient allocation of investment resources. IN A CAPITALIST SOCIETY, prices for goods and service play the central role in resource allocation. The strength of capitalism lies in its ability to make these prices reflect essential information so that resources are deployed efficiently. Consider a fishmonger whose prices for different kinds of fish change every day in response to availability. These prices have a direct effect on the behavior of customers entering the shop: if the price is high they may choose to eat beef for dinner instead. In other words, the allocation of fish to the most efficient uses (in this case, to the people with the highest marginal utility of fish consumption) is accomplished by price changes. These price changes directly regulate the use of the fish. Now consider the equity capital market and its relation to the allocation of funds for capital investment. If a company's share price goes

Why Does Stock Market Volatility Change Over Time

Abstract: This paper analyzes the relation of stock volatility with real and nominal macroeconomic volatility, financial leverage, stock trading activity, default risk, and firm profitability using monthly data from 1857-1986. An important fact, previously noted by Officer [l973], is that stock return variability was unusually high during the 1929-1940 Great Depression. Moreover, leverage has a relatively small effect on stock volatility. The amplitude of the fluctuations in aggregate stock volatility is difficult to explain using simple models of stock valuation.

Going Public: The Theory and Evidence on How Companies Raise Equity Finance

Abstract: A critical decision in the life of a company is if, and when, to "go public" by listing themselves on the stock exchange. Two anomalies are apparent: that companies taking this route systematically initially underprice their shares and that over the longer term they under-perform other companies. This book investigates these issues in a non-technical manner, drawing upon international evidence from private sector companies and privatizations.

Institutional Investors and the Informational Efficiency of Prices

Abstract: Using a broad panel of NYSE-listed stocks between 1983 and 2004, we study the relation between institutional shareholdings and the relative informational efficiency of prices, measured as deviations from a random walk. Stocks with greater institutional ownership are priced more efficiently, and we show that variation in liquidity does not drive this result. Onemechanismthroughwhichpricesbecomemoreefficientisinstitutionaltradingactivity, even when institutions trade passively. But efficiency is also directly related to institutional holdings, even after controlling for institutional trading, analyst coverage, short selling, variation in liquidity, and firm characteristics. (JEL G12, G14) Institutional shareholdings and trading have increased dramatically over the past several decades. In 1965, members of the Securities Industries Association held 16% of U.S. equities; in 2001, they held 61% according to the Securities Industry Association Fact Book (2002). Moreover, nonretail trading accounted for 96% of New York Stock Exchange (NYSE) trading volume in 2002 (Jones and Lipson 2004). How this broadened scope of institutional ownership and trading affects the quality of equity markets, however, is an open question. Using a broad cross-section of NYSE-listed stocks between 1983 and 2004, we link institutional ownership to the informational efficiency of transaction prices. Intraday prices of stocks with greater institutional ownership more closelytrackfundamentalvalues,inthattheymorepreciselyresemblearandom walk, than prices of stocks with less institutional ownership. Moreover, we use proprietary NYSE data to establish institutional trading activity as one source of the improved short-horizon information environment. These findings have