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


  • Art Durnev,

  • Randall Morck,

  • Bernard Yeung

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    • Durnev is from the Department of Finance, University of Miami, Morck is the Stephen A. Jarislowsky Distinguished Professor of Finance at the School of Business, University of Alberta, and Yeung is the Abraham Krasnoff Professor of International Business, Professor of Economics, and Professor of Management at the Stern School of Business, New York University. We are grateful for helpful comments by the editor, Richard Green, an anonymous referee, Yakov Amihud, Luis Cabral, Serdar Dinc, Bernard Dumas, William Goetzmann, David Hirshleifer, Bjørne Jørgensen, Andrew Karolyi, Han Kim, Claudio Loderer, J.P. Mei, Roberta Romano, Robert Shiller, Andrei Shleifer, Richard Sloan, Rene Stulz, Jeremy Stein, Richard Thaler, Larry White and Daniel Wolfenzon; and to participants at the NBER Corporate Finance Seminar, le Centre Interuniversitaire de Recherche en Analyse des Organisations (CIRANO) in Montreal, the Econometric Society meeting at the University of California in Los Angeles, the European Financial Management Association meeting in Lugano, Baruch-CUNY, Columbia Business School, Indiana University, the University of Alberta, the University of Michigan, the University of Minnesota, MIT Sloan School, New York University, the Ohio State University, the University of North Carolina, the University of Chicago, Wharton School at the University of Pennsylvania, and Yale University; and to students in Andrei Shleifer's Research Seminar on Behavioral Finance at Harvard.


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.