Stock Prices, Information And Capital Allocation

Contrasted with informational efficiency of the stock market, capital allocation efficiency issomething lacking enough attention, especially after Fama (1970) firstly surveyed the literaturesabout stock price behavior in the framework of Efficient Market Hypothesis (EMH). From then on,economists have based their researches on this framework. The idea behind these researches is thatwith some certain assumptions, EMH is equivalent to the capital allocation efficiency. But theconclusion is denounced by the fact that in china, as the EMH efficiency is greatly enhanced, thecapital allocation efficiency goes worse and worse. This fact as well as some other facts tells us thecapital allocation efficiency needs more attention, and it is necessary for us to reconsider therelationship between the informational efficiency and the capital allocation efficiency.In a world with uncertainty and informational asymmetry, individuals possess dispersed bits ofincomplete and frequently contradictory knowledge. The peculiar character of the problem of arational economic order is determined precisely by the fact that the knowledge of the circumstancesof which we must make use never exists in concentrated or integrated form but solely as thedispersed bits of incomplete and frequently contradictory knowledge which all the separateindividuals possess. The economic problem of society is thus not merely a problem of how toallocate "given"resources-if "given"is taken to mean given to a single mind which deliberatelysolves the problem set by these "data". It is rather a problem of how to secure the best use ofresources known to any of the members of society, for ends whose relative importance only theseindividuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is notgiven to anyone in its totality.Different from common prices, stock price reveals the private knowledge in a different way, whichdetermines the special micro-mechanism by which stock price guide the capital allocation. In brief,the micro-mechanism includes: the Tobin's Q effect, the Financial Constraint effect and the MarketPressure effect.As to the relationship between the informational efficiency and the capital allocation efficiency, Itreat the EMH as anidealization that provides a useful reference point and introduced the concept ofrelative efficiency. The most advantage of the concept of relative efficiency, as opposed to theall-or-nothing notion of absolute efficiency, is that with this concept, we can analyze differentmarket with different level of efficiency. Relative efficiency of stock market can be measure bystock return synchronicity (SYNCH). Using the R-square statistics of the market model as ameasure of synchronicity of stock price movement, we find stock prices move together more in lowincome economies than in high income economies. This is because they capitalize both moremarket-wide risk and less firm-specific risk in low income economies. This finding is clearly notdue to market size differences, and is only partially explained by slightly higher fundamentalsfluctuation in low income economies. However, variables measuring investor protection andgovernment honesty do appear to explain these differences. We conjecture that a country'sinstitutional development affects the returns to gathering firm-specific and market-wide informationdifferently, and promotes informed trading as opposed to noise trading.Besides the academic attempt to complement the deficiency of the relevant research, the other mainpurpose is to deal with some critical issues in the advance of china's sock market. In the last chapterof my dissertation, I test if there exist micro-mechanisms in china by which stock price guides thecapital allocation, the conclusion shows us there doesn't exist such micro-mechanisms. On the otherhand, I analyze the relative efficiency of china's stock market, and propose my suggestion as how todevelop china's stock market.