The Limitations of Stock Market Efficiency : Price Informativeness and CEO Turnover

There is a tenuous link between market efficiency and economic efficiency in that stock prices are more informative when the information has less social value. We theoretically and empirically investigate this link in the context of CEO turnover. Our theoretical model predicts that, although the board of directors relies on the stock market information to make CEO turnover decisions, stock price informativeness is negatively related to the board's monitoring effort. Our empirical tests support the model predictions. In addition, using the passage of the Sarbanes-Oxley Act as a quasi-natural experiment, we find that the legislation has a negative impact on stock price informativeness