Do managers pay attention to the market? A review of the relationship between stock price informativeness and investment

Paulo Silva

Journal of Multinational Financial Management, 2021, vol. 59, issue C

Abstract: Using a multi-country sample of stocks, the sensitivity of investment to stock price informativeness is assessed. Consistent with prior research, we find a positive association between investment and stock prices. This association becomes stronger when prices are more informative. However, while measures of price informativeness related to the amount of (market-based) private information conveyed by prices heighten the investment-to-stock price sensitivity, others, akin to the weak form of the efficient market hypothesis, hardly affect it. This is consistent with only revelatory private information acquired by traders influencing managers’ investment decisions. The relevance of private information revealed in secondary markets also extends to financing decisions, with price informativeness also shaping the association between external financing and growth opportunities. Not least importantly, we show that abnormal investment generated by the amount of private information contained in prices fosters future profitability and aggregate efficiency. In robustness tests, the presence of a causal relationship flowing from price informativeness to (abnormal) investment rates is appraised. Using two quasi-random events that enhanced the information environment of stocks (MSCI ACWI reconstitutions and the passing of JGTRRA in 2003), we present evidence that exogenous variation of the amount of private information contained in stock prices affects investment rates.

Keywords: Investment; Stock prices; Price informativeness; Managerial learning; Real effects of financial markets (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:59:y:2021:i:c:s1042444x20300645

DOI: 10.1016/j.mulfin.2020.100675

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