64 Pages Posted: 26 Dec 2015 Last revised: 16 Dec 2016
Date Written: December 14, 2016
We show that firms significantly reduce their investment in response to non-fundamental drops in the stock price of their product-market peers. This spillover is consistent with the hypothesis that managers have limited ability to filter out the noise in stock prices when using these as a source of information. As predicted by this hypothesis, the influence of the noise in peers' stock prices on a firm's investment is stronger when peers' prices are more informative, and weaker when managers are better informed. Our findings suggest a new channel through which local non-fundamental shocks to stock prices have real effects.
Suggested Citation: Suggested Citation
Dessaint, Olivier and Foucault, Thierry and Frésard, Laurent and Matray, Adrien, Ripple Effects of Noise on Corporate Investment (December 14, 2016). Rotman School of Management Working Paper No. 2707999; HEC Paris Research Paper No. FIN-2016-1127. Available at SSRN: https://ssrn.com/abstract=2707999 or http://dx.doi.org/10.2139/ssrn.2707999