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Shareholder-Manager Disagreement, Animal Spirits, and Corporate Investment

54 Pages Posted: 16 Aug 2006  

Toni M. Whited

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

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Date Written: August 12, 2006

Abstract

We develop a theoretical model in which disagreement between management and shareholders creates a link between investment and the stock market. We show that the stock price decreases in the level of disagreement. Because management uses the stock price to infer the level of disagreement, the firm's investment is positively correlated with its stock price, even when investment is not financed by an equity issue. Empirically, we find that Tobin's q is negatively related to a proxy for disagreement. This proxy is unrelated to traditional indicators of asymmetric information. Using simple estimation of an investment Euler equation, we find first that a high stock price and a low level of disagreement act together to increase investment today relative to investment tomorrow. We conclude that disagreement drives corporate investment to a much greater extent than either asymmetric information or managerial entrenchment.

Keywords: Disagreement, Investment, Stock Price, Financial Flexibility, Managerial Entrenchment

JEL Classification: G31, E22, G32, G34

Suggested Citation

Whited, Toni M. and Thakor, Anjan V., Shareholder-Manager Disagreement, Animal Spirits, and Corporate Investment (August 12, 2006). Available at SSRN: https://ssrn.com/abstract=924105 or http://dx.doi.org/10.2139/ssrn.924105

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

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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