"Price Informativeness and Investment Sensitivity to Stock Prices"
Publication type: Working paper
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.
The PDF above is a pre-copy-editing, author-produced PDF of the article published in the Review of Financial Studies 20, no. 3 (May 2007): 619-650, following peer review. The definitive publisher-authenticated version is available online at: < http://dx.doi.org/10.1093/rfs/hhl024 >.
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