Information in Financial Markets and Its Real Effects*

Financial markets have a central role in allocating resources in modern economies. One of the main functions of financial markets is the discovery of information. This information in turn helps guide decisions in the real side of the economy. The literature on the feedback effect of financial markets explores this channel. Empirical work tries to identify the informational feedback from markets to corporate decisions. Theoretical work explores implications that this feedback effect has for the equilibrium in financial markets and for economic efficiency. Current trends in information technology under the FinTech revolution change the nature of information processing in financial markets and so may change the nature of the feedback effect. In this article, I review the main themes of this developing literature and connect them to the current information revolution. I also discuss directions for future research.

Automated summary

Financial markets play a crucial role in allocating resources in modern economies by discovering information to guide real economic decisions. The literature suggests that feedback from financial markets has significant implications for market equilibrium and economic efficiency. With the ongoing FinTech revolution, the nature of information processing in financial markets is changing, potentially altering the feedback effect.