Measuring firm-specific informational efficiency without conditioning on a public announcement

Abstract

We exploit the availability of active single-stock futures on India's National Stock Exchange (NSE) to provide estimates of overall informational efficiency, without conditioning on a public announcement. The key is the estimation of the primitive parameters of an asset pricing model with private information and noise. The variance–covariance parameters governing futures prices and terminal values can be inverted to obtain the Maximum Likelihood Estimators (MLEs) of the precision of private information and the variance of liquidity motivated trades. The Signal-to Signal-plus-Noise (SSN) ratio – our measure of overall informational efficiency – is a function of these primitive parameters. Our primary findings show that there is considerable variation across firms in these parameters despite only large active firms being available for futures trading. We also examine the cross-sectional relationship of this measure of informational efficiency and corporate governance. Overall informational efficiency increa...