Do Customers Learn from Stock Prices?

Abstract

This paper provides evidence that a firm's stock price movements affect its customer demand. I develop a model in which customers learn about a firm's product quality partially from its stock price. This learning induces feedback from the price to customer demand. Furthermore, the firm manager adjusts product launch decisions in anticipation of these demand shifts. Consistent with the model's implications, I find that non-fundamental price declines due to mutual fund redemptions reduce sales and online customer interest. This depressed demand is accompanied by a lower probability of product launches. My findings underscore the real effects of financial market prices.

Keywords: Learning from Prices, Customer Learning, Google Searches, Product Launch

JEL Classification: D12, D83, G14, G31