Ripple Effects of Noise on Corporate Investment
59 Pages Posted: 2 Feb 2016
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Noisy Stock Prices and Corporate Investment
Date Written: January 2016
Abstract
Firms reduce investment in response to non-fundamental drops in the stock price of their product-market peers, as predicted by a model in which managers rely on stock prices as a source of information but cannot perfectly filter out noise in prices. The model also implies the response of investment to noise in peers' stock prices should be stronger when these prices are more informative, and weaker when managers are better informed. We find support for these predictions. Overall, our results highlight a new channel through which non-fundamental shocks to the stock prices of some firms influence real decisions of other firms.
Keywords: informational efficiency, investment, learning, noise
JEL Classification: G14, G31, G32
Suggested Citation: Suggested Citation
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Ripple Effects of Noise on Corporate Investment
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