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Firm-Specific Information and the Efficiency of Investment

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  • Chari, Anusha

    (U of Michigan)

  • Henry, Peter B.

    (Stanford U)

Abstract

In the three-year period following stock market liberalizations, the growth rate of the typical firm's capital stock exceeds its pre-liberalization mean by an average of 4.1 percentage points. Cross-sectional changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization. Panel data estimations show that a 10-percentage point increase in a firm's expected future sales growth predicts a 2.9- to 3.5-percentage point increase in the growth rate of its capital stock, depending on the specification; country-specific changes in the cost of capital are also important, generating an economically and statistically significant change in capital stock growth in almost every specification; firm-specific changes in risk premia do not affect investment.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1975.

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Date of creation: Aug 2007
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Handle: RePEc:ecl:stabus:1975

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