Working Paper: CEPR ID: DP11081
Authors: Olivier Dessaint; Thierry Foucault; Laurent Frsard; Adrien Matray
Abstract: Firms reduce investment in response to non-fundamental drops in the stock price of their product-market peers, as predicted by a model in which managers rely on stock prices as a source of information but cannot perfectly filter out noise in prices. The model also implies the response of investment to noise in peers' stock prices should be stronger when these prices are more informative, and weaker when managers are better informed. We find support for these predictions. Overall, our results highlight a new channel through which non-fundamental shocks to the stock prices of some firms influence real decisions of other firms.
Keywords: Informational Efficiency; Investment; Learning; Noise
JEL Codes: G14; G31; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonfundamental drops in peers' stock prices (G19) | firms reduce investment (D25) |
| noise in peers' stock prices (G19) | sensitivity of investment (G31) |
| informativeness of peers' stock prices (G14) | sensitivity of investment to noise (G11) |
| quality of managers' private information (D82) | sensitivity of investment to noise (G11) |
| nonfundamental component of peers' stock prices (G19) | capital allocation decisions (G31) |
| nonfundamental shocks to stock prices (G19) | influence on real investment decisions (G31) |