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Do Managers Listen to the Market?

James B. Kau

University of Georgia - Department of Insurance, Legal Studies, Real Estate

James S. Linck

Southern Methodist University

Paul H. Rubin

Emory University - Department of Economics

March 7, 2008

There are competing theories as to whether managers learn from stock prices. Dye and Sridhar (2002), for example, argue that capital markets can be better informed than the firm itself, while Roll (1986) argues managers may ignore market signals due to hubris. In this paper, we examine whether managers listen to the market in making major corporate investments, and whether agency costs and corporate governance mechanisms help explain managers' propensity to listen. We find that, on average, managers listen to the market: they are more likely to cancel investments when the market reacts unfavorably to the related announcement. Further, we find mixed evidence consistent with the notion that managers' propensity to listen is related to agency costs. We find that firms tend to listen to the market more when more of their shares are held by large blockholders, and when their CEOs have higher pay-performance sensitivities.

Number of Pages in PDF File: 42

Keywords: Agency costs, information markets, investment decisions, merger, acquisition, learning

JEL Classification: G31, G34

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Date posted: October 28, 2004 ; Last revised: March 12, 2008

Suggested Citation

Kau, James B. and Linck, James S. and Rubin, Paul H., Do Managers Listen to the Market? (March 7, 2008). Available at SSRN: http://ssrn.com/abstract=610062 or http://dx.doi.org/10.2139/ssrn.610062

Contact Information

James B. Kau
University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )
Athens, GA 30602-6254
United States
706-542-9110 (Phone)
706-542-4295 (Fax)
James S. Linck (Contact Author)
Southern Methodist University ( email )
Cox School of Business
Dallas, TX 75275
United States
214-768-3933 (Phone)
HOME PAGE: http://cox.smu.edu
Paul H. Rubin
Emory University - Department of Economics ( email )
1602 Fishburne Drive
Atlanta, GA 30322
United States
404-931-0493 (Phone)
630-604-9609 (Fax)
HOME PAGE: http://www.economics.emory.edu/Rubi.htm
Feedback to SSRN

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