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Ripple Effects of Noise on Corporate Investment

64 Pages Posted: 26 Dec 2015 Last revised: 16 Dec 2016

Olivier Dessaint

University of Toronto - Rotman School of Management

Thierry Foucault

HEC Paris - Finance Department

Laurent Frésard

University of Maryland - Robert H. Smith School of Business

Adrien Matray

Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: December 14, 2016

Abstract

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

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

Olivier Dessaint

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Thierry Foucault

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
(33)139679569 (Phone)
(33)139677085 (Fax)

HOME PAGE: http://thierryfoucault.com/

Laurent Frésard (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Adrien Matray

Princeton University ( email )

Bendheim Center for Finance
26 Prospect Avenue
Princeton, NJ 08540
United States

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