Will arbitrage capital flow into markets experiencing shocks, mitigating adverse effects on price efficiency? Not necessarily. In a dynamic model with privately informed capital-constrained arbitrageurs, price efficiency plays a dual role, determining both the profitability of new arbitrage and the ability to close existing positions profitably. An adverse shock to efficiency lengthens arbitrage duration, effectively reducing the amount of arbitrage capital available for new positions....

Does the stock market exert short-term pressure on listed firms, do they respond, and is this response value reducing? We show that limited investor horizons indeed have those consequences, as follows. First, informative stock prices increase firm value; in our model, they reduce the agency cost of incentivizing managers. Second, short project maturity improves stock price informativeness by catering to informed investors with short horizons....