Informational Performance and Competitive Capital-Market Scaling
WORKING PAPER
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This paper develops a systemic interpretation of the functioning of capital markets that formally accounts for the observed frequency distribution of Tobin’s q.
The strong modality in the distribution of q is taken to be conditioned by the arbitrage operations of corporate insiders. We take the persistent spread in the distribution of q to reflect the presence of obstacles to that agency, which impose an informational constraint on the operation of capital markets. This spread is also shaped by the fact that the measure of Tobin’s q e↵ectively scales the expected returns for an individual corporation relative to those expected of all corporations. This scaling reflects aggregate measures of bullishness in investors’ valuations that insiders do not seek to exploit. In addition to accounting for the frequency distribution of q observed for the past 50 years, this interpretation points to a systemic diagnostic for the presence of speculative equity-price bubbles, and o↵ers a new informational characterization efficiency in capital markets. According to the latter, U.S. capital markets have experienced a steady secular loss in their informational efficiency since the early 1980s.