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Product Market Competition, Insider Trading, and Stock Market Efficiency
Author(s) -
PERESS JOEL
Publication year - 2010
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2009.01522.x
Subject(s) - monopolistic competition , product market , monopoly , market power , insider , equity (law) , monetary economics , business , market capitalization , economics , stock (firearms) , market microstructure , capital market , stock market , microeconomics , industrial organization , financial economics , finance , paleontology , horse , incentive , political science , law , biology , mechanical engineering , order (exchange) , engineering
How does competition in firms' product markets influence their behavior in equity markets? Do product market imperfections spread to equity markets? We examine these questions in a noisy rational expectations model in which firms operate under monopolistic competition while their shares trade in perfectly competitive markets. Firms use their monopoly power to pass on shocks to customers, thereby insulating their profits. This encourages stock trading, expedites the capitalization of private information into stock prices and improves the allocation of capital. Several implications are derived and tested.