European Business Schools Librarian's Group

Les Cahiers de Recherche,
HEC Paris

No 1127: Ripple Effects of Noise on Corporate Investment

Thierry Foucault (), Olivier Dessaint , Laurent Fr├ęsard and Adrien Matray

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: corporate; investment

57 pages, December 23, 2015

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