Shareholder-Manager Disagreement, Animal Spirits, and Corporate Investment
Toni M. Whited
University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research
Anjan V. Thakor
Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)
August 12, 2006
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.
Number of Pages in PDF File: 54
Keywords: Disagreement, Investment, Stock Price, Financial Flexibility, Managerial Entrenchment
JEL Classification: G31, E22, G32, G34
Date posted: August 16, 2006
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