Learning from Peers' Stock Prices and Corporate Investment

Abstract

Peers' valuation matters for firms' investment: a one standard deviation increase in peers' valuation is associated with a 5.9% increase in corporate investment. This association is stronger when a firm's stock price informativeness is lower or when its managers appear less informed. Also, the sensitivity of a firm's investment to its stock price is lower when its peers' stock prices informativeness is higher or when demands for its products and its peers' products are more correlated. Furthermore the sensitivity of firms' investment to their peers' valuation drops significantly after going public. These findings are uniquely predicted by a model in which managers learn information from their peers' valuation.

Keywords: Corporate Investment, Managerial Learning, Peers, Informed Trading

JEL Classification: G31, D21, D83