Historical Impulse Response of Return Analysis Shows Information Technology Improves Stock Market Efficiency

We compare average impulse response of rate of return curves computed from more than sixty-seven years of historical Dow Jones Industrial, Transportation, and Utility Average closing values. The curves are relatively consistent in shape until the 1990s, when marked changes, indicative of improved market efficiency, occur for the Dow Jones Industrial Average. We argue that the effect is a result of the increased availability and reduced cost of online stock trading and of the more rapid dissemination and diffusion of information made possible by information technology. The basis for this argument is that: 1) the effect occurs only for the Industrial Average, which is comprised of stocks which are most wellknown to the investing public, and not for the Transportation or Utility Averages, which are comprised of less well-known stocks; and 2) the effect is progressive and contemporaneous with the growth of the use of personal computing and the internet.