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Asymmetric information, firm investment and stock prices

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  • Dongmin Kong
  • Tusheng Xiao
  • Shasha Liu
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    Abstract

    Purpose–The purpose of this paper is to explore the relations of investment and stock prices (Tobin-Q), the impact of asymmetric information on the investment sensitivity to stock price, and the impact of asymmetric information on the stock price sensitivity to investment. Design/methodology/approach–Research was conducted with 313 listed companies and 1,878 firm-year observations from Chinese stock market. Empirical studies were conducted based on two hypotheses by using R2, information delay and scores of information disclosure as measures of asymmetric information and taking changes in book assets and capital expenditures scaled by book assets as measures of investment. Findings–The key findings of the paper are: managers are learning from the market when they make investment decisions; the asymmetric information has a significant negative impact on the investment sensitivity to stock price; and the asymmetric information has a significant positive impact on the stock price sensitivity to investment. Practical implications–The paper has a significant practical implication for regulation policy making in stock market. Originality/value–The paper fills the research gap in two points. It studies the impact of asymmetric information on the investment sensitivity to stock price, and the impact of asymmetric information on the stock price sensitivity to investment in Chinese stock market for the first time.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal China Finance Review International.

    Volume (Year): 1 (2010)
    Issue (Month): 1 (December)
    Pages: 6-33

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    Handle: RePEc:eme:cfripp:v:1:y:2010:i:1:p:6-33

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    Related research

    Keywords: China; Information strategy; Investments; Stock prices;

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    References

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    1. James Dow & Rohit Rahi, 1996. "Informed Trading, Investment and Welfare," Archive Working Papers 029, Birkbeck, Department of Economics, Mathematics & Statistics.
    2. Lindenberg, Eric B & Ross, Stephen A, 1981. "Tobin's q Ratio and Industrial Organization," The Journal of Business, University of Chicago Press, vol. 54(1), pages 1-32, January.
    3. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    5. Jeffrey A. Wurgler & Malcolm P. Baker, 2001. "Market Timing and Capital Structure," Yale School of Management Working Papers ysm181, Yale School of Management.
    6. Andrei Shleifer ad Robert W. Vishny, 1995. "The Limits of Arbitrage," Harvard Institute of Economic Research Working Papers 1725, Harvard - Institute of Economic Research.
    7. Chan, Kalok & Hameed, Allaudeen, 2006. "Stock price synchronicity and analyst coverage in emerging markets," Journal of Financial Economics, Elsevier, vol. 80(1), pages 115-147, April.
    8. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    9. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
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