Ripple Effects of Noise on Corporate Investment

Thierry Foucault, Frésard, Laurent and Adrien Matray

No 11081, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Firms reduce investment in response to non-fundamental drops in the stock price of their product-market peers, as predicted by a model in which managers rely on stock prices as a source of information but cannot perfectly filter out noise in prices. The model also implies the response of investment to noise in peers' stock prices should be stronger when these prices are more informative, and weaker when managers are better informed. We find support for these predictions. Overall, our results highlight a new channel through which non-fundamental shocks to the stock prices of some firms influence real decisions of other firms.

Keywords: Informational efficiency; investment; Learning; Noise (search for similar items in EconPapers)
JEL-codes: G14 G31 G32 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Ripple Effects of Noise on Corporate Investment (2015)
Working Paper: Ripple Effects of Noise on Corporate Investment (2015)
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