Can Enhanced Stock Price Informativeness Improve the Investment Efficiency of Chinese Listed Companies?

Although stock price informativeness has been posited to improve investment efficiency, there has been little empirical evidence supporting this claim to date. By the use of Chinese listed companies from 2002 to 2006 as the research sample, the effect of stock price informativeness on investment efficiency was empirically studied based on corporate level for the first time. The empirical results indicate: stock price informativeness is strongly negatively associated with both firm overinvestment and underinvestment. Further, stock price informativeness also can notably decrease the sensitivity of overinvestment to free cash flow and the sensitivity of underinvestment to financing constraints. It finally eliminates the possibility that the negative correlation is caused by the case that managers decrease stock price informativeness to conceal the investment losses.