Which Firms Follow the Market? An Analysis of Corporate Investment Decisions

52 Pages Posted: 19 Mar 2006  

Tor-Erik Bakke

University of Oklahoma - Division of Finance

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Date Written: November 17, 2006

Abstract

Do firms extract information from their own stock prices when making investment decisions? To answer this question, we use and extend an econometric errors-in-variables remedy, which is appropriate because movements in the stock price in which the manager takes little interest can be treated econometrically as measurement error. We find that firm investment does not respond to measures of stock-market mispricing. Investment does respond to legitimate information in price movements, but only for firms that rely on outside equity financing and whose shares are not mispriced. Interestingly, these firms' behavior changed only little during the late 1990s.

Keywords: Investment, stock market, market timing, measurement error

JEL Classification: G32, E22

Suggested Citation

Bakke, Tor-Erik and Whited, Toni M., Which Firms Follow the Market? An Analysis of Corporate Investment Decisions (November 17, 2006). AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891570 or http://dx.doi.org/10.2139/ssrn.891570

Tor-Erik Bakke

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States

Toni M. Whited (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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