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Have financial markets become more informative?
The finance industry has grown. Financial markets have become more liquid. Information technology has improved. But have prices become more informative? Using stock and bond prices to forecast earnings, we find that the information content of market prices has not increased since 1960. The magnitude of earnings surprises, however, has increased. A baseline model predicts that as the efficiency of information production increases, prices become more disperse and covary more strongly with future earnings. The forecastable component of earnings improves capital allocation and serves as a direct ...