Corporate Decisions, Information, and Prices: Do Managers Move Prices or Do Prices Move Managers?

Ron Giammarino, Robert Heinkel, Burton Hollifield () and Kai Li ()

No 2001-E16, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: We study the way in which information about corporate decisions is reflected in stock prices. In the corporate finance literature a typical assumption is that managers have superior information that is revealed to the market by their corporate decisions and personal equity trades. In contrast, many market microstructure models assume that corporate decisions are exogenous and that informed agents are outside the firm. We formulate hypotheses that capture these views in the context of a seasoned equity issue. We consider insider trading and stock price movements from the time a firm files a prospectus through to the time that it decides to either complete or withdraw the issue. Evidence from 1,081 equity registrations and insider trading during this interval supports the hypothesis that price movements are generated by informed outsiders, and that corporate decisions and managerial trading respond to these price movements.

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