Information, Competition, and Investment Sensitivity to Peer Stock Prices

Abstract

We show empirically that firms' investment responds to innovations in stock prices of peer firms. This response is stronger and more positive when peer firms have greater informed trading and more informative prices. We also find higher competition, faster growth, greater correlation in fundamentals, and higher capital intensity within the peer group all increase this sensitivity. Our results suggest that managers rely on information in peer firms' prices in making capital allocation decisions, especially when, because of a challenging or rapidly changing operating environment, they face higher costs of inaction and higher rewards from a strong and prompt response.

JEL Classification: G31