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Market Efficiency and Real Efficiency: The Connect and Disconnect via Feedback Effects

Author

Listed:
  • Liyan Yang

    (Joseph L. Rotman School of Management)

  • Itay Goldstein

    (University of Pennsylvania)

Abstract

We study a model to explore the (dis)connect between market efficiency and real efficiency when real decision makers learn information from the market to guide their actions. We emphasize two channels that determine whether the two efficiency concepts are aligned. The "externality channel" says that individual learning outcomes may not always map into real efficiency because the presence of externality causes real decision makers to overuse the price information. The "(mis)match channel" emphasizes the fact that market efficiency concerns how much information the market reveals about the overall firm value, while improving real efficiency needs the market to reveal much information that is relevant for real decisions. Our analysis highlights the delicate link between market efficiency and real efficiency.

Suggested Citation

  • Liyan Yang & Itay Goldstein, 2014. "Market Efficiency and Real Efficiency: The Connect and Disconnect via Feedback Effects," 2014 Meeting Papers 154, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:154
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    References listed on IDEAS

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    Cited by:

    1. Steven Chong Xiao, 2020. "Do Noisy Stock Prices Impede Real Efficiency?," Management Science, INFORMS, vol. 66(12), pages 5990-6014, December.
    2. Lutz G. Arnold & Sebastian Zelzner, 2020. "Welfare Effects of the Allocation of Talent to Financial Trading: What Does the Grossman-Stiglitz Model Say?," Working Papers 190, Bavarian Graduate Program in Economics (BGPE).
    3. Houdou Basse Mama, 2017. "The interaction between stock prices and corporate investment: is Europe different?," Review of Managerial Science, Springer, vol. 11(2), pages 315-351, March.

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