Stock Price Informativeness and Output Growth: Some Evidence from Emerging Economies

This paper extends the output growth model tested by Levine and Zervos (1998) by including a measure for capital allocation efficiency proxied by stock price informativeness. Using a sample of 62 countries, this study finds that stock price informativeness as measured by firm-specific return variation positively contributes to output growth after controlling for variables in the Levine and Zervos (1998) model. This effect is particularly strong for high property rights protection environments and common law countries in emerging economies. We find that stock price informativeness acts as a substitute for stock market liquidity on predicting long-run output growth in emerging economies but not in more developed economies. These results are consistent with the Roll’s (1988) claim: more information-laden stock prices signal efficient stock markets and, therefore, stronger output growth.