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Shareholder-Manager Disagreement, Animal Spirits, and Corporate Investment

Anjan V. Thakor
Olin Business School, Washington University in St. Louis and ECGI

Toni M. Whited
University of Rochester, Simon School of Business


August 12, 2006


Abstract:     
We develop a theoretical model in which disagreement between management and shareholders creates a link between investment and the stock market. We show that the stock price decreases in the level of disagreement. Because management uses the stock price to infer the level of disagreement, the firm's investment is positively correlated with its stock price, even when investment is not financed by an equity issue. Empirically, we find that Tobin's q is negatively related to a proxy for disagreement. This proxy is unrelated to traditional indicators of asymmetric information. Using simple estimation of an investment Euler equation, we find first that a high stock price and a low level of disagreement act together to increase investment today relative to investment tomorrow. We conclude that disagreement drives corporate investment to a much greater extent than either asymmetric information or managerial entrenchment.

Keywords: Disagreement, Investment, Stock Price, Financial Flexibility, Managerial Entrenchment

JEL Classifications: G31, E22, G32, G34

Working Paper Series

Date posted: August 16, 2006 ; Last revised: August 16, 2006

Suggested Citation

Whited, Toni M. and Thakor, Anjan V., Shareholder-Manager Disagreement, Animal Spirits, and Corporate Investment (August 12, 2006). Available at SSRN: http://ssrn.com/abstract=924105


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Contact Information

Toni M. Whited (Contact Author)
University of Rochester, Simon School of Business ( email )
Rochester, NY 14627
United States
Anjan V. Thakor
Olin Business School, Washington University in St. Louis and ECGI ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
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