Noisy Stock Prices and Corporate Investment

Olivier Dessaint, Thierry Foucault, Laurent Frésard and Adrien Matray

The Review of Financial Studies, 2019, vol. 32, issue 7, 2625-2672

Abstract: Firms significantly reduce their investment in response to nonfundamental drops in the stock price of their product-market peers. We argue that this results stems from managers’ limited ability to filter out the noise in the stock prices when using them as signals about their investment opportunities. Ensuing losses of capital investment and shareholders’ wealth are economically large and even affect firms not facing severe financing constraints or agency problems. Our findings offer a novel perspective on how stock market inefficiencies can affect the real economy, even in the absence of financing or agency frictions.Received December 14, 2016; editorial decision July 30, 2018 by Editor Itay Goldstein. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Date: 2019
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