Feedback from Stock Prices to Cash Flows” (formerly called “Real Effects of Financial Market Trading)

Avanidhar Subrahmanyam and Sheridan Titman

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: This paper explores how fincial market prices directly inflnce a firm’s cash flows. Feedback from financial market prices to crash flows arises when firms’ non-financial stakeholders, e.g., its customers, employees, and suppliers, make decisions that are contingent on the information revealed by the price. When there are complementarities across these stakeholders, such feedback leads to cascades in which relatively small stock price moves trigger substantial changes in asset values. The paper analyzes the relation between such feedback effects and parameters such as the cost of information acquisition, the volume of liquidity trading, the volatility of the value of existing projects, the risk aversion of liquidity suppliers, and the precision of managerial information releases.

Date: 1998-07-18
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