Value-Enhancing Capital Budgeting and Firm-specific Stock Return Variation

We document a robust cross-sectional positive association across industries between a measure of the economic efficiency of corporate investment and the magnitude of firm-specific variation in stock returns. This finding is interesting for two reasons, neither of which is a priori obvious. First, it adds further support to the view that firm-specific return variation gauges the extent to which information about the firm is quickly and accurately reflected in share prices. Second, it can be interpreted as evidence that more informative stock prices facilitate more efficient corporate investment. Copyright 2004 by The American Finance Association.