Informational Efficiency Of Stock Prices Research Articles

Social media, investor‒firm interactions and informational efficiency of stock prices: Evidence from China

Using a sample of Chinese listed companies from 2010 to 2022, we examine how investor‒firm online interactions influence informational efficiency of stock prices. The empirical results indicate that investor–firm online interactions significantly enhance informational efficiency. After conducting a series of robustness checks, the conclusions remain valid. Mechanistic analysis demonstrates that investor–firm online interactions enhance informational efficiency primarily by reducing information asymmetry and correcting stock mispricing. We emphasize the critical importance of retail investor–firm online interactions within social media platforms in promoting informational efficiency of stock prices.

Insider stock pledging and stock price informativeness: Evidence from India

AbstractInsiders’ shares can act as collateral while raising funds from lenders. This study examines the impact of insiders’ stock pledging activities on stock price informativeness using a sample of 1835 Indian firms. Our findings report that insider stock pledging increases the informational efficiency of stock prices. This informational efficiency increases for larger firms with: (1) financial constraints (high leverage and low cash holdings); (2) greater reliance on trade credit; and (3) higher indulgence in related party transactions. We also provide evidence on abnormal share turnover as a trading mechanism through which insider stock pledging is related to stock price informativeness. Our findings are robust across different specifications and after accounting for endogeneity issues.

Stock Market Efficiency in the Time of COVID-19: Evidence from Industry Stock Returns

Using industry portfolios as test assets and a battery of statistical tests, we study if the informational efficiency of stock prices has declined after the COVID-19 crisis began. The results suggest that the predictability of stock returns in some industries has increased during the COVID-19 period. Markets appear to have become less informationally efficient during the COVID-19 crisis.
 JEL Classification Code: C58, G01, G10, G14.

Discussion of “ETFs and information transfer across firms”

Bhojraj, Mohanram, and Zhang (2020) examine how the presence of different types of Exchange Traded Funds (ETFs) affects information transfer across firms. Using earnings announcements as an information event, the authors document that sector ETFs improve informational efficiency by better facilitating information transfer across firms. Furthermore, sector ETFs reduce post-earnings announcement drift. However, the findings using broad ETFs are mixed. In this discussion, I first place the paper within the broader literature that investigates the informational efficiency of stock prices. Second, I highlight the key insights and contributions of the paper. Third, I discuss empirical design issues and the interpretation of findings. Lastly, I suggest areas for future research.

Does low latency trading improve market efficiency? A discussion

Chordia and Miao (2020) provide evidence that low-latency trading (LLT) improves the long-term informational efficiency of stock prices. This discussion raises two primary concerns with their analysis. First, the mechanism through which LLT enhances long-term efficiency is unclear. Second, CM's measure of LLT trading activity is correlated with non-LLT trading activity, which may in turn cause the documented improvements in efficiency. We close by proposing an alternative explanation—changes in market microstructure have had a bifurcated impact on liquidity, enhancing efficiency for large and liquid stocks, but not for small and illiquid stocks.

Does Low Latency Trading Improve Market Efficiency? A Discussion

Chordia and Miao (2020) provide evidence that low-latency trading (LLT) improves the long-term informational efficiency of stock prices. This discussion raises two primary concerns with their analysis. First, the mechanism through which LLT enhances long-term efficiency is unclear. Second, CM's measure of LLT trading activity is correlated with non-LLT trading activity, which may in turn cause the documented improvements in efficiency. We close by proposing an alternative explanation—changes in market microstructure have had a bifurcated impact on liquidity, enhancing efficiency for large and liquid stocks, but not for small and illiquid stocks.

Stock market liberalization, foreign institutional investors, and informational efficiency of stock prices: Evidence from an emerging market

AbstractThis study investigates the effects of investments by qualified foreign institutional investors (QFIIs) on the informational efficiency of stock prices in Chinese A‐share stock markets. Employing a large sample of listed firms from 2004 to 2012, we document a significant and positive relationship between stock price informativeness and stock ownership by foreign institutional investors. We also use the instrument‐variable approach, propensity‐score matching method, as well as an alternative measure of informational efficiency to ensure the robustness of our findings. We document that the effects of foreign ownership on informational efficiency is stronger for firms with lower levels of assets intangibility and in regions with less developed institutions. In addition, we document that the effects of foreign ownership on informational efficiency is more pronounced when QFIIs have better local information and more incentives to monitor.

Institutional ownership and the choice of equity issue method

We examine how institutional ownership, which reflects the informational efficiency of stock prices (Boehmer and Kelley, 2009), impacts the seasoned equity offering (SEO) issue method choice between shelf offerings and traditional SEOs. We find that firms with greater institutional ownership, particularly long term ownership, tend to choose shelf offerings. We control for issue method choice and find that the offer discount decreases with institutional ownership for both shelf and traditional issuers and that higher institutional ownership reduces direct issue costs and is related to a shorter due diligence process for traditional SEOs. This suggests that underwriters are more likely to be able to perform the certification function (and with less effort) for issuers whose stock is priced more efficiently.

Hedge Fund Holdings and Stock Market Efficiency

We study the relation between hedge fund equity holdings and measures of informational efficiency of stock prices derived from intraday transactions as well as daily data. Our findings support the role of hedge funds as arbitrageurs who reduce mispricing in the market. Hedge funds invest in stocks that are relatively inefficiently priced, and the price efficiency of these stocks improves after hedge funds increase their holdings. Hedge fund ownership contributes more to efficient pricing than ownership by other types of institutional investors. However, stocks held by hedge funds experienced large declines in price efficiency during several liquidity crises. Received July 27, 2016; editorial decision January 07, 2017 by Editor Wayne Ferson.

Do Foreign Investors Improve Informational Efficiency of Stock Prices? Evidence from Japan

This study investigates the impact of foreign investors on the informational efficiency of stock prices in local markets. Using a large sample of Japanese firms over the period 1975 to 2008, we find that prices deviate less from a random walk for stocks with a large change in foreign ownership. This relation is robust to controls for local institutional ownership, stock liquidity, and firm fixed effects. Granger causality tests show that changes in foreign investor trading predict changes in price efficiency in the next period, but not vice versa. Finally, we use a quasi-natural experiment to show that an increase in foreign ownership causes an improvement in price efficiency. Collectively, these results suggest that foreign investors improve price efficiency in local stock markets.

Do foreign investors improve informational efficiency of stock prices? Evidence from Japan

This study investigates the impact of foreign investors on the informational efficiency of stock prices in local markets. Using a large sample of Japanese firms over the period 1976 to 2008, we find that prices deviate less from a random walk for stocks with a large change in foreign ownership. This relation is robust to controls for local institutional ownership, stock liquidity, and firm fixed effects. Granger causality tests show that changes in foreign investor trading predict changes in price efficiency in the next period, but not vice versa. Finally, we use a quasi-natural experiment to show that an increase in foreign ownership causes an improvement in price efficiency. Collectively, these results suggest that foreign investors improve price efficiency in local stock markets.

Forward-Looking MD&A Disclosures and the Information Environment

We use computer-intensive techniques to study the informational properties of forward-looking disclosures in the management discussion and analysis (MD&A) sections of 10-K filings made with the Securities and Exchange Commission. We find that firms make more forward-looking MD&A disclosures when their stock prices have lower informational efficiency, i.e., when their stock prices poorly reflect future earnings information. The greater levels of forward-looking MD&A disclosures help improve yet are unable to completely mitigate the lower informational efficiency of stock prices for such firms. These findings are stronger for operations-related forward-looking disclosures, disclosures that are made prior to 2000, and disclosures made by loss firms. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1921 . This paper was accepted by Mary Barth, accounting.

Concentrated short‐selling activity: bear raids or contrarian trading?

PurposeThe purpose of this paper is to investigate what is denoted as episodes of concentrated short‐selling activity, or consecutive days of abnormal short‐sale activity in a particular stock. The motivation to do so is two fold. First, US regulators and regulators in other countries have restricted short selling in order to protect the integrity of markets. Second, there is some conflicting academic research determining whether short sellers are manipulative in nature.Design/methodology/approachAfter defining these episodes by concentrated short selling, the paper examines returns before and after to determine whether these episodes target struggling stocks and whether these episodes predict negative returns.FindingsContrary to the argument that episodes of concentrated shorting activity target struggling stocks, it is found that these episodes follow periods of positive returns. Further, it is found that abnormal volatility and high trading volume also predict the occurrence of these episodes. These results suggest that concentrated shorting occurs in stocks that are increasing in price during periods of heterogeneity among investors expectations (Berkman et al.). It is also found that short sellers during bear raids are able to predict when prices reverse as returns become negative the day after the last day of the raid. Combined, the results suggest that bear raids by short sellers are important for the efficiency of markets.Originality/valueThe results from this study have important regulatory implications as well as implications regarding the informational efficiency of stock prices.

International Evidence on Algorithmic Trading

We use a large sample from 2001 – 2009 that incorporates 39 exchanges and an average of 12,800 different common stocks to assess the effect of algorithmic trading (AT) intensity on liquidity in the equity market, short-term volatility, and the informational efficiency of stock prices. We exploit the first availability of co-location facilities to identify the direction of causality. We find that, on average, greater AT intensity improves liquidity and informational efficiency, but increases volatility. The volatility increase is robust to a range of different volatility measures and it is not due to more “good” volatility that would arise from faster price discovery. These patterns are widespread and are not limited to a few markets, but they vary in the cross-section of stocks. In contrast to the average effect, more AT reduces liquidity in small stocks; has little effect on the liquidity of low-priced or highvolatility stocks; and leads to greater increases in volatility in these stocks. Finally, during days when market making is difficult, AT provide less liquidity, improve efficiency more, and increase volatility more than on other days.

Short Selling Around Corporate Acquisitions

Using daily short sale transactions data for firms traded in the Taiwan Stock Exchange (TWSE) from January 1991 to January 2007, we examine the pattern of short selling trading prior to 338 acquisition announcements. Consistent with the view that short sellers act as informed traders, we find that they have the ability to predict and time their trades prior to significant negative acquisition announcements. Specifically, our evidence shows that abnormal short selling prior to acquisition announcements is significantly associated with negative (bad acquisition news) post-announcement abnormal returns. The empirical results also show that short sellers act as specialized monitors who generate and release value-relevant information to the stock market prior to actual bad acquisition events. In addition, we find that short selling is driven by speculative rather than hedging motives. Robustness checks and the undertaking of alternative tests show that daily changes in short sales transactions lead future stock prices, consistent with the notion that the information advantage of short sellers broadens the informational efficiency of stock prices.

Changes in the Information Efficiency of Stock Prices: Additional Evidence

AbstractPrevious research shows, using data from three quarters after the implementation of regulation fair disclosure (Reg FD), that there is an improvement in the informational efficiency of stock prices after Reg FD. We compare the informational efficiency of stock prices in four pre‐Reg FD quarters (1999–2000) and 12 post‐Reg FD quarters (2002–2005). The improvement in the informational efficiency of stock prices previously reported in the immediate aftermath of Reg FD persists in later periods.

Main Street versus Wall Street: Efficiency and Wealth Redistribution Effects of Insider Trading

By addressing the interaction between security market microstructure and the generalized agency conflict between managers and shareholders, we study the effects of informed insider trading on productive efficiency, price discovery, and wealth redistribution. Insider trading can lead simultaneously to production distortions and higher ex ante shareholder value because there is a redistribution of wealth from uninformed liquidity traders to uninformed outside shareholders through the optimal design of managerial compensation contracts; this is in contrast to the literature that considers insider trading to either unambiguously worsen the managerial agency problem or improve managerial incentives. Security market characteristics, such as the trading noise in the firm's stock, affect productive efficiency by influencing the manager's equity-based compensation and, in turn, equilibrium market liquidity is influenced by firm-specific characteristics. Insider trading can therefore have conflicting effects on productive efficiency and the informational efficiency of stock prices; it also generates wealth redistribution not only between uninformed and informed traders but between uninformed traders and uninformed shareholders as well. We identify the firm and market characteristics that determine the net welfare impact of insider trading.

Margin Rules, Informed Trading in Derivatives, and Price Dynamics

We analyze the impact of option trading and margin rules on the behavior of informed traders and on the microstructure of stock and option markets. In the absence of binding margin requirements, the introduction of an options market causes informed traders to exhibit a relative trading bias towards the stock because of its greater information sensitivity. In turn, this widens the stock's bid-ask spread. But when informed traders are subject to margin requirements, their bias towards the stock is enhanced or mitigated depending on the leverage provided by the option relative to the stock, leading to wider or narrower stock bid-ask spreads. The introduction of option trading, with or without margin requirements, unambiguously improves the informational efficiency of stock prices. Margin rules improve market efficiency when stock and option margins are sufficiently large or small but not when they are of moderate size.

Contractual restrictions on insider trading: a welfare analysis

This paper analyzes the welfare effects of permitting firms to negotiate contractually the right to allow corporate insiders to trade shares in the firm on private information. A computational framework is employed to (i) analyze formally the effects of insider trading on managerial investment choice, the informational efficiency of stock prices, and the welfare of all investor types; and (ii) examine the effectiveness of various compensation schemes (such as stock and insider trading rights) to mitigate conflicts of interest between managers and shareholders. I show that shareholders will typically choose not to grant insider trading rights to managers. This decision is socially optimal.

On the Frequency, Quality, and Informationl Role of Mandatory Financial Reports

In this paper we study the relation between the frequency of mandatory financial disclosures, the amount of information voluntarily disclosed by privately informed managers, and the resulting informational efficiency of stock prices. Our analysis emphasizes the confirmatory role of mandatory financial reports and uses frequency to highlight the difference between this view of reporting and the prevailing view of mandatory disclosures as sources of information. We model the mandatory financial disclosures as verifiable but noisy and, possibly, late signals of management's private value-relevant information. Accordingly, financial statements may be of little use as a timely, primary source of information for the purpose of valuing the firm. However, since the audited statements can be used to evaluate the truthfulness of management's past voluntary disclosures (i.e., to confirm that they are indeed truthfully, they may be useful in creating an environment in which management