Abstract

http://ssrn.com/abstract=924105
 
 

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Shareholder-Manager Disagreement, Animal Spirits, and Corporate Investment


Toni M. Whited


University of Rochester - Simon Business School; 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


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.

Number of Pages in PDF File: 54

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

JEL Classification: G31, E22, G32, G34

working papers series





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Date posted: 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 or http://dx.doi.org/10.2139/ssrn.924105

Contact Information

Toni M. Whited (Contact Author)
University of Rochester - Simon Business School ( email )
Rochester, NY 14627
United States
HOME PAGE: http://toni.marginalq.com

National Bureau of Economic Research ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Anjan V. Thakor
Washington University, Saint Louis - John M. Olin School of Business ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
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