Noisy Stock Prices and Corporate Investment

67 Pages Posted: 26 Dec 2015 Last revised: 16 Feb 2018

Olivier Dessaint

University of Toronto - Rotman School of Management

Thierry Foucault

HEC Paris - Finance Department

Laurent Frésard

University of Lugano; Swiss Finance Institute; University of Maryland - Robert H. Smith School of Business

Adrien Matray

Princeton University

Date Written: February 12, 2018

Abstract

Firms significantly reduce their investment in response to non-fundamental drops in the stock price of their product-market peers. We argue that this result arises because of managers' limited ability to filter out the noise in stock prices when using them as signals about their investment opportunities. The resulting losses of capital investment and shareholders' wealth are economically large, and affect even firms that are not facing severe financing constraints or agency problems. Our findings offer a novel perspective on how stock market inefficiencies can affect the real economy, even in the absence of financing or agency frictions.

Suggested Citation

Dessaint, Olivier and Foucault, Thierry and Frésard, Laurent and Matray, Adrien, Noisy Stock Prices and Corporate Investment (February 12, 2018). 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 Lugano ( email )

Via Giuseppe Buffi 13
Lugano, Ticino 6900
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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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