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R-squared and the economy

Author: Randall Morck; Bernard Yeung; Wie-Chien Yu; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2013.
Series: Working paper series (National Bureau of Economic Research), no. 19017.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
A literature review demonstrates credible evidence linking higher firm-specific stock return volatility to a more efficient stock market on one hand; and to higher firm-specific fundamentals volatility on the other. These results are reconciled if (1) market efficiency is interpreted as functionally efficiency, the allocation of capital to its best uses; (2) capital's best use is often financing Schumpeterian  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Randall Morck; Bernard Yeung; Wie-Chien Yu; National Bureau of Economic Research.
OCLC Number: 842232884
Notes: Title from http://www.nber.org/papers/19017 viewed May 9, 2013.
"May 2013."
Description: 1 online resource (54 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 19017.
Responsibility: Randall Morck, Bernard Yeung, Wayne Yu.

Abstract:

A literature review demonstrates credible evidence linking higher firm-specific stock return volatility to a more efficient stock market on one hand; and to higher firm-specific fundamentals volatility on the other. These results are reconciled if (1) market efficiency is interpreted as functionally efficiency, the allocation of capital to its best uses; (2) capital's best use is often financing Schumpeterian creative destruction, which magnifies the gap between creative winners and destroyed losers, thus magnifying firm-specific fundamentals variation; (3) initially impecunious innovators require functionally efficient markets to finance their innovations. Informed arbitrage, disclosure quality, and insider trading regulations can contribute to functional efficiency, and thus help sustained ongoing creative destruction. A range of seeming inconsistencies in the empirical literature are reconciled if information has high fixed costs, driving a wedge between functional efficiency and traditional finance concepts of information efficiency. This wedge implies positive and negative feedback loops, whereby creative destruction might either enhance or diminish functional efficiency, thereby either accelerating or retarding its subsequent pace. Institutional differences across economies and over time potentially that affect which feedback predominates merit public policy attention.

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