Ripple Effects of Noise on Corporate Investment

Dessaint, Olivier; Foucault, Thierry; Frésard, Laurent; Matray, Adrien

Ripple Effects of Noise on Corporate Investment

CEPR Discussion Paper No. DP11081

59 Pages Posted: 2 Feb 2016

See all articles by Olivier Dessaint

Olivier Dessaint

University of Toronto - Rotman School of Management

Laurent Frésard

University of Lugano; Swiss Finance Institute

Adrien Matray

Princeton University

There are 2 versions of this paper

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

Dessaint, Olivier and Foucault, Thierry and Frésard, Laurent and Matray, Adrien, Ripple Effects of Noise on Corporate Investment (January 2016). CEPR Discussion Paper No. DP11081. Available at SSRN: https://ssrn.com/abstract=2726561