IDEAS home Printed from https://ideas.repec.org/a/oup/revfin/v27y2023i1p1-32..html
   My bibliography  Save this article

Information in Financial Markets and Its Real Effects

Author

Listed:
  • Itay Goldstein

Abstract

Financial markets have a central role in allocating resources in modern economies. One of the main functions of financial markets is the discovery of information. This information in turn helps guide decisions in the real side of the economy. The literature on the “feedback effect” of financial markets explores this channel. Empirical work tries to identify the informational feedback from markets to corporate decisions. Theoretical work explores implications that this feedback effect has for the equilibrium in financial markets and for economic efficiency. Current trends in information technology under the FinTech revolution change the nature of information processing in financial markets and so may change the nature of the feedback effect. In this article, I review the main themes of this developing literature and connect them to the current information revolution. I also discuss directions for future research.

Suggested Citation

  • Itay Goldstein, 2023. "Information in Financial Markets and Its Real Effects," Review of Finance, European Finance Association, vol. 27(1), pages 1-32.
    • Handle: RePEc:oup:revfin:v:27:y:2023:i:1:p:1-32.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rof/rfac052
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2013. "Trading frenzies and their impact on real investment," Journal of Financial Economics, Elsevier, vol. 109(2), pages 566-582.
    2. Lantian Liang & Ryan Williams & Steven Chong Xiao, 2021. "Stock Market Information and Innovative Investment in the Supply Chain [Corporate equity ownership, strategic alliances, and product market relationships]," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 10(4), pages 856-894.
    3. Meng Gao & Jiekun Huang & Itay Goldstein, 2020. "Informing the Market: The Effect of Modern Information Technologies on Information Production," The Review of Financial Studies, Society for Financial Studies, vol. 33(4), pages 1367-1411.
    4. Jonathan Brogaard & Matthew C Ringgenberg & David Sovich, 2019. "The Economic Impact of Index Investing," The Review of Financial Studies, Society for Financial Studies, vol. 32(9), pages 3461-3499.
    5. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    6. Joel M. David & Hugo A. Hopenhayn & Venky Venkateswaran, 2016. "Information, Misallocation, and Aggregate Productivity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(2), pages 943-1005.
    7. Thierry Foucault & Laurent Fresard, 2019. "Corporate Strategy, Conformism, and the Stock Market," The Review of Financial Studies, Society for Financial Studies, vol. 32(3), pages 905-950.
    8. Alex Edmans, 2009. "Blockholder Trading, Market Efficiency, and Managerial Myopia," Journal of Finance, American Finance Association, vol. 64(6), pages 2481-2513, December.
    9. Itay Goldstein & Wei Jiang & G Andrew Karolyi, 2019. "To FinTech and Beyond," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1647-1661.
    10. Sudarshan Jayaraman & Joanna Shuang Wu, 2019. "Is Silence Golden? Real Effects of Mandatory Disclosure," The Review of Financial Studies, Society for Financial Studies, vol. 32(6), pages 2225-2259.
    11. Bryan Kelly & Alexander Ljungqvist, 2012. "Testing Asymmetric-Information Asset Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1366-1413.
    12. Thierry Foucault & Laurent Frésard, 2012. "Cross-Listing, Investment Sensitivity to Stock Price, and the Learning Hypothesis," The Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3305-3350.
    13. Sandra Betton & B. Espen Eckbo & Rex Thompson & Karin S. Thorburn, 2014. "Merger Negotiations with Stock Market Feedback," Journal of Finance, American Finance Association, vol. 69(4), pages 1705-1745, August.
    14. James Dow & Itay Goldstein & Alexander Guembel, 2017. "Incentives for Information Production in Markets where Prices Affect Real Investment," Journal of the European Economic Association, European Economic Association, vol. 15(4), pages 877-909.
    15. Sean Cao & Wei Jiang & Junbo L. Wang & Baozhong Yang, 2021. "From Man vs. Machine to Man + Machine: The Art and AI of Stock Analyses," NBER Working Papers 28800, National Bureau of Economic Research, Inc.
    16. Qi Chen & Itay Goldstein & Wei Jiang, 2007. "Price Informativeness and Investment Sensitivity to Stock Price," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 619-650.
    17. Bai, Jennie & Philippon, Thomas & Savov, Alexi, 2016. "Have financial markets become more informative?," Journal of Financial Economics, Elsevier, vol. 122(3), pages 625-654.
    18. James Dow, 2003. "Informed Trading, Investment, and Welfare," The Journal of Business, University of Chicago Press, vol. 76(3), pages 439-454, July.
    19. Coval, Joshua & Stafford, Erik, 2007. "Asset fire sales (and purchases) in equity markets," Journal of Financial Economics, Elsevier, vol. 86(2), pages 479-512, November.
    20. Alex Edmans & Mirko S. Heinle & Chong Huang, 2016. "The Real Costs of Financial Efficiency When Some Information Is Soft," Review of Finance, European Finance Association, vol. 20(6), pages 2151-2182.
    21. Philip Bond & Itay Goldstein, 2015. "Government Intervention and Information Aggregation by Prices," Journal of Finance, American Finance Association, vol. 70(6), pages 2777-2812, December.
    22. Philip Bond & Itay Goldstein & Edward Simpson Prescott, 2010. "Market-Based Corrective Actions," The Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 781-820, February.
    23. Yangyang Chen & Jeffrey Ng & Xin Yang, 2021. "Talk Less, Learn More: Strategic Disclosure in Response to Managerial Learning from the Options Market," Journal of Accounting Research, Wiley Blackwell, vol. 59(5), pages 1609-1649, December.
    24. Itay Goldstein & Alexander Guembel, 2008. "Manipulation and the Allocational Role of Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(1), pages 133-164.
    25. Malcolm Baker, 2009. "Capital Market-Driven Corporate Finance," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 181-205, November.
    26. Dow, James & Gorton, Gary, 1997. "Stock Market Efficiency and Economic Efficiency: Is There a Connection?," Journal of Finance, American Finance Association, vol. 52(3), pages 1087-1129, July.
    27. Steven Chong Xiao, 2020. "Do Noisy Stock Prices Impede Real Efficiency?," Management Science, INFORMS, vol. 66(12), pages 5990-6014, December.
    28. repec:bla:jfinan:v:44:y:1989:i:3:p:633-46 is not listed on IDEAS
    29. Avanidhar Subrahmanyam & Sheridan Titman, 1999. "The Going‐Public Decision and the Development of Financial Markets," Journal of Finance, American Finance Association, vol. 54(3), pages 1045-1082, June.
    30. Cookson, J. Anthony & Niessner, Marina & Schiller, Christoph M., 2022. "Can Social Media Inform Corporate Decisions? Evidence from Merger Withdrawals," SocArXiv 56yrj, Center for Open Science.
    31. Leland, Hayne E, 1992. "Insider Trading: Should It Be Prohibited?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 859-887, August.
    32. Markus K. Brunnermeier & Martin Oehmke, 2014. "Predatory Short Selling," Review of Finance, European Finance Association, vol. 18(6), pages 2153-2195.
    33. Maryam Farboodi & Adrien Matray & Laura Veldkamp & Venky Venkateswaran, 2022. "Where Has All the Data Gone?," The Review of Financial Studies, Society for Financial Studies, vol. 35(7), pages 3101-3138.
    34. Goldstein, Itay & Yang, Liyan, 2019. "Good disclosure, bad disclosure," Journal of Financial Economics, Elsevier, vol. 131(1), pages 118-138.
    35. Dugast, Jérôme & Foucault, Thierry, 2018. "Data abundance and asset price informativeness," Journal of Financial Economics, Elsevier, vol. 130(2), pages 367-391.
    36. Yuanzhi Luo, 2005. "Do Insiders Learn from Outsiders? Evidence from Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 60(4), pages 1951-1982, August.
    37. Bennett, Benjamin & Stulz, René & Wang, Zexi, 2020. "Does the stock market make firms more productive?," Journal of Financial Economics, Elsevier, vol. 136(2), pages 281-306.
    38. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    39. Alex Edmans & Itay Goldstein & Wei Jiang, 2012. "The Real Effects of Financial Markets: The Impact of Prices on Takeovers," Journal of Finance, American Finance Association, vol. 67(3), pages 933-971, June.
    40. Tor-Erik Bakke & Toni M. Whited, 2010. "Which Firms Follow the Market? An Analysis of Corporate Investment Decisions," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1941-1980.
    41. Alex Edmans & Itay Goldstein & Wei Jiang, 2015. "Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage," American Economic Review, American Economic Association, vol. 105(12), pages 3766-3797, December.
    42. Boleslavsky, Raphael & Kelly, David L. & Taylor, Curtis R., 2017. "Selloffs, bailouts, and feedback: Can asset markets inform policy?," Journal of Economic Theory, Elsevier, vol. 169(C), pages 294-343.
    43. Edmans, Alex & Jayaraman, Sudarshan & Schneemeier, Jan, 2017. "The source of information in prices and investment-price sensitivity," Journal of Financial Economics, Elsevier, vol. 126(1), pages 74-96.
    44. Xuewen Liu, 2015. "Short-Selling Attacks and Creditor Runs," Management Science, INFORMS, vol. 61(4), pages 814-830, April.
    45. Itay Goldstein & Liyan Yang, 2022. "Commodity Financialization and Information Transmission," Journal of Finance, American Finance Association, vol. 77(5), pages 2613-2667, October.
    46. Meng Gao & Jiekun Huang & Itay GoldsteinEditor, 2020. "Informing the Market: The Effect of Modern Information Technologies on Information Production," Review of Finance, European Finance Association, vol. 33(4), pages 1367-1411.
    47. Antoine Faure-Grimaud, 2002. "Using Stock Price Information to Regulate Firms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(1), pages 169-190.
    48. Malcolm Wardlaw, 2020. "Measuring Mutual Fund Flow Pressure as Shock to Stock Returns," Journal of Finance, American Finance Association, vol. 75(6), pages 3221-3243, December.
    49. Brian M. Weller, 2018. "Does Algorithmic Trading Reduce Information Acquisition?," The Review of Financial Studies, Society for Financial Studies, vol. 31(6), pages 2184-2226.
    50. Michael Sockin & Wei Xiong, 2015. "Informational Frictions and Commodity Markets," Journal of Finance, American Finance Association, vol. 70(5), pages 2063-2098, October.
    51. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
    52. Jess Benhabib & Xuewen Liu & Pengfei Wang, 2019. "Financial Markets, the Real Economy, and Self‐Fulfilling Uncertainties," Journal of Finance, American Finance Association, vol. 74(3), pages 1503-1557, June.
    53. Gredil, Oleg R. & Kapadia, Nishad & Lee, Jung Hoon, 2022. "On the information content of credit ratings and market-based measures of default risk," Journal of Financial Economics, Elsevier, vol. 146(1), pages 172-204.
    54. Michael J. Fishman & Kathleen M. Hagerty, 1989. "Disclosure Decisions by Firms and the Competition for Price Efficiency," Journal of Finance, American Finance Association, vol. 44(3), pages 633-646, July.
    55. Amy P. Hutton & Lian Fen Lee & Susan Z. Shu, 2012. "Do Managers Always Know Better? The Relative Accuracy of Management and Analyst Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 50(5), pages 1217-1244, December.
    56. Andrew Bird & Stephen A Karolyi & Thomas G Ruchti & Phong Truong, 2021. "More is Less: Publicizing Information and Market Feedback [Illiquidity and stock returns: cross-section and time-series effects]," Review of Finance, European Finance Association, vol. 25(3), pages 745-775.
    57. Pingyang Gao & Pierre Jinghong Liang, 2013. "Informational Feedback, Adverse Selection, and Optimal Disclosure Policy," Journal of Accounting Research, Wiley Blackwell, vol. 51(5), pages 1133-1158, December.
    58. Olivier Dessaint & Thierry Foucault & Laurent Frésard & Adrien Matray, 2019. "Noisy Stock Prices and Corporate Investment," The Review of Financial Studies, Society for Financial Studies, vol. 32(7), pages 2625-2672.
    59. Olivier Dessaint & Jacques Olivier & Clemens A Otto & David Thesmar & Itay Goldstein, 2021. "CAPM-Based Company (Mis)valuations," Review of Economic Studies, Oxford University Press, vol. 34(1), pages 1-66.
    60. Christina Zhu, 2019. "Big Data as a Governance Mechanism," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 2021-2061.
    61. Khanna, Naveen & Mathews, Richmond D., 2012. "Doing battle with short sellers: The conflicted role of blockholders in bear raids," Journal of Financial Economics, Elsevier, vol. 106(2), pages 229-246.
    62. Gustavo Grullon & Sébastien Michenaud & James P. Weston, 2015. "The Real Effects of Short-Selling Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 28(6), pages 1737-1767.
    63. Olivier Dessaint & Jacques Olivier & Clemens A Otto & David Thesmar, 2021. "CAPM-Based Company (Mis)valuations [Credit lines as monitored liquidity insurance: Theory and evidence]," The Review of Financial Studies, Society for Financial Studies, vol. 34(1), pages 1-66.
    64. Raphael Boleslavsky & Christopher A Hennessy & David L Kelly, 2022. "Markets versus Mechanisms," The Review of Financial Studies, Society for Financial Studies, vol. 35(7), pages 3139-3174.
    65. Avanidhar Subrahmanyam & Sheridan Titman, 2001. "Feedback from Stock Prices to Cash Flows," Journal of Finance, American Finance Association, vol. 56(6), pages 2389-2413, December.
    66. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
    67. Blanco, Iván & Wehrheim, David, 2017. "The bright side of financial derivatives: Options trading and firm innovation," Journal of Financial Economics, Elsevier, vol. 125(1), pages 99-119.
    68. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443.
    69. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    70. Khanna, Naveen & Sonti, Ramana, 2004. "Value creating stock manipulation: feedback effect of stock prices on firm value," Journal of Financial Markets, Elsevier, vol. 7(3), pages 237-270, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fung, Scott & Loveland, Robert, 2024. "Option trading activity and capital reallocation efficiency: Evidence from corporate restructurings," Finance Research Letters, Elsevier, vol. 66(C).
    2. Chen, Bin-xia & Sun, Yan-lin, 2024. "Financial market connectedness between the U.S. and China: A new perspective based on non-linear causality networks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 90(C).
    3. Liu, Xiao & Wang, Ziyu & Zhu, Minxing, 2024. "Asset prices’ responses to public information manipulation: The role of market feedback," Economics Letters, Elsevier, vol. 239(C).
    4. Manish Jha & Jialin Qian & Michael Weber & Baozhong Yang, 2024. "ChatGPT and Corporate Policies," NBER Working Papers 32161, National Bureau of Economic Research, Inc.
    5. Zhou, Dong-hai & Liu, Xiao-xing, 2023. "Do world stock markets “jump” together? A measure of high-frequency volatility risk spillover networks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    6. Anna Bayona & Oana Peia & Razvan Vlahu, 2023. "Credit Ratings and Investments," Working Papers 776, DNB.
    7. Hsien-Yi Chen & Sheng-Syan Chen, 2024. "How does credit market innovation affect the fiscal policy of state governments?," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 389-420, February.
    8. Zhang, Teng & Xu, Zhiwei, 2023. "The informational feedback effect of stock prices on corporate investments: A comparison of new energy firms and traditional energy firms in China," Energy Economics, Elsevier, vol. 127(PA).
    9. Chen, Guanhua & Liu, Xiangli & Liu, Xiao & Zhao, Zhihua, 2024. "ETF ownership and stock pricing efficiency: The role of ETF arbitrage," Finance Research Letters, Elsevier, vol. 62(PA).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Steven Chong Xiao, 2020. "Do Noisy Stock Prices Impede Real Efficiency?," Management Science, INFORMS, vol. 66(12), pages 5990-6014, December.
    2. Sani, Jalal & Shroff, Nemit & White, Hal, 2023. "Spillover effects of mandatory portfolio disclosures on corporate investment," Journal of Accounting and Economics, Elsevier, vol. 76(2).
    3. Bennett, Benjamin & Stulz, René & Wang, Zexi, 2020. "Does the stock market make firms more productive?," Journal of Financial Economics, Elsevier, vol. 136(2), pages 281-306.
    4. Itay Goldstein & Shijie Yang & Luo Zuo, 2020. "The Real Effects of Modern Information Technologies: Evidence from the EDGAR Implementation," NBER Working Papers 27529, National Bureau of Economic Research, Inc.
    5. Caio Machado & Ana Elisa Pereira, 2020. "Competing for Stock Market Feedback," Documentos de Trabajo 545, Instituto de Economia. Pontificia Universidad Católica de Chile..
    6. Ye, Mao & Zheng, Miles Y. & Zhu, Wei, 2023. "The effect of tick size on managerial learning from stock prices," Journal of Accounting and Economics, Elsevier, vol. 75(1).
    7. Caio Machado & Ana Elisa Pereira, 2023. "Optimal Capital Structure with Stock Market Feedback," Review of Finance, European Finance Association, vol. 27(4), pages 1329-1371.
    8. Cheung, William Ming Yan & Im, Hyun Joong & Selvam, Srinivasan, 2023. "Stock liquidity and investment efficiency: Evidence from the split-share structure reform in China," Emerging Markets Review, Elsevier, vol. 56(C).
    9. Aliyev, Nihad & Huseynov, Fariz & Rzayev, Khaladdin, 2022. "Algorithmic trading and investment-to-price sensitivity," LSE Research Online Documents on Economics 118844, London School of Economics and Political Science, LSE Library.
    10. Gu, Ming & Li, Dongxu & Ni, Xiaoran, 2022. "Too much to learn? The (un)intended consequences of RegTech development on mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 76(C).
    11. Bai, Jennie & Philippon, Thomas & Savov, Alexi, 2016. "Have financial markets become more informative?," Journal of Financial Economics, Elsevier, vol. 122(3), pages 625-654.
    12. Rösch, Dominik M. & Subrahmanyam, Avanidhar & van Dijk, Mathijs A., 2022. "Investor short-termism and real investment," Journal of Financial Markets, Elsevier, vol. 59(PB).
    13. Caio Machado & Ana Elisa Pereira, 2019. "Optimal Investment and Capital Structure with Stock Market Feedback," Documentos de Trabajo 527, Instituto de Economia. Pontificia Universidad Católica de Chile..
    14. Goldstein, Itay & Yang, Liyan, 2019. "Good disclosure, bad disclosure," Journal of Financial Economics, Elsevier, vol. 131(1), pages 118-138.
    15. Tse-Chun Lin & Qi Liu & Bo Sun, 2015. "Contracting with Feedback," International Finance Discussion Papers 1143, Board of Governors of the Federal Reserve System (U.S.).
    16. Toni Ahnert & Caio Machado & Ana Elisa Pereira, 2020. "Trading for Bailouts," Staff Working Papers 20-23, Bank of Canada.
    17. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443.
    18. Jianghua Shen & Lingmin Xie & Zhimin Xie, 2022. "The unintended consequence of financial statement comparability: evidence from managerial learning practices," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 3073-3106, September.
    19. Xiong, Yan & Yang, Liyan, 2021. "Disclosure, competition, and learning from asset prices," Journal of Economic Theory, Elsevier, vol. 197(C).
    20. Khanna, Naveen & Mathews, Richmond D., 2012. "Doing battle with short sellers: The conflicted role of blockholders in bear raids," Journal of Financial Economics, Elsevier, vol. 106(2), pages 229-246.

    More about this item

    Keywords

    Financial markets; Corporate finance; Information; Feedback effect; Financial technology;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:revfin:v:27:y:2023:i:1:p:1-32.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/eufaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.