Evaluating Price Informativeness and its Determinants

We develop a price informativeness measure that reflects the accuracy of investors’ forecasts of future earnings embedded in current price. We then empirically evaluate economyand firm-level price informativeness. Investors’ forecasts of economy-level earnings are more optimistic (pessimistic) when sentiment is positive (negative). Their forecasts are more biased and more imprecise when sentiment is extreme, and especially when it is negative and extreme. Firm-level prices are less informative when: (1) uncertainty is high; (2) analyst following is low; (3) the firm provides highly aggregated accounting data; and, (4) a large fraction of the firm’s shares is held by retail investors.