Do Managers Listen to the Market?

42 Pages Posted: 28 Oct 2004 Last revised: 4 Mar 2018

See all articles by James B. Kau

James B. Kau

University of Georgia - Department of Insurance, Legal Studies, Real Estate

James S. Linck

Southern Methodist University (SMU) - Finance Department

Paul H. Rubin

1350 Main St UNIT 1703

Date Written: March 7, 2008

Abstract

There are competing theories as to whether managers learn from stock prices. Dye and Sridhar (2002), for example, argue that capital markets can be better informed than the firm itself, while Roll (1986) argues managers may ignore market signals due to hubris. In this paper, we examine whether managers listen to the market in making major corporate investments, and whether agency costs and corporate governance mechanisms help explain managers' propensity to listen. We find that, on average, managers listen to the market: they are more likely to cancel investments when the market reacts unfavorably to the related announcement. Further, we find mixed evidence consistent with the notion that managers' propensity to listen is related to agency costs. We find that firms tend to listen to the market more when more of their shares are held by large blockholders, and when their CEOs have higher pay-performance sensitivities.

Keywords: Agency costs, information markets, investment decisions, merger, acquisition, learning

JEL Classification: G31, G34

Suggested Citation

Kau, James B. and Linck, James S. and Rubin, Paul H., Do Managers Listen to the Market? (March 7, 2008). Journal of Corporate Finance, Vol. 14, No. 4, 2008, Available at SSRN: https://ssrn.com/abstract=610062 or http://dx.doi.org/10.2139/ssrn.610062

James B. Kau

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-9110 (Phone)
706-542-4295 (Fax)

James S. Linck (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States

Paul H. Rubin

1350 Main St UNIT 1703 ( email )

1350 Main Steet #1703
Sarasota, FL 34236
United States
14049310493 (Phone)

HOME PAGE: http://www.economics.emory.edu/Rubi.htm

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