Price Informativeness and Investment Sensitivity to Stock Price

46 Pages Posted: 3 Mar 2005

See all articles by Qi Chen

Qi Chen

Duke University - Fuqua School of Business

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Wei Jiang

Columbia Business School - Finance and Economics

Date Written: September 26, 2003

Abstract

Stock prices and real investments are highly correlated. Previous literature has offered two main explanations for this high correlation. The first explanation relies on price being informative about investment opportunities, the second one is based on financing constraints. In this paper we empirically examine the effect of price informativeness on the sensitivity of investment to stock price. Using price non-synchronicity and PIN as measures of price informativeness, we find that the degree of informativeness is positively correlated with the sensitivity of investment to stock price. Since, according to previous literature, these measures reflect private information, the result suggests that prices perform an active role, i.e., that managers learn from stock price when making investment decisions. This result is robust to the inclusion of various control variables (such as controls for managerial information) and to changes in specification.

Keywords: investments and stock prices, price informativeness, firm-specific return variation, PIN

JEL Classification: G12, G31, M41

Suggested Citation

Chen, Qi and Goldstein, Itay and Jiang, Wei, Price Informativeness and Investment Sensitivity to Stock Price (September 26, 2003). 14th Annual Conference on Financial Economics and Accounting (FEA); 6th Annual Texas Finance Festival. Available at SSRN: https://ssrn.com/abstract=451322 or http://dx.doi.org/10.2139/ssrn.451322

Qi Chen

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
(919) 660-7753 (Phone)

Itay Goldstein (Contact Author)

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Wei Jiang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

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