IDEAS home Printed from https://ideas.repec.org/p/hal/journl/hal-00977071.html
   My bibliography  Save this paper

Learning from peers' stock prices and corporate investment

Author

Listed:
  • Thierry Foucault

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Laurent Fresard

    (Robert H. Smith School of Business)

Abstract

Peers' valuation matters for firms' investment: a one standard deviation increase in peers' valuation is associated with a 5.9% increase in corporate investment. This association is stronger when a firm's stock price informativeness is lower or when its managers appear less informed. Also, the sensitivity of a firm's investment to its stock price is lower when its peers' stock price informativeness is higher or when demands for its products and its peers' products are more correlated. Furthermore, the sensitivity of firms' investment to their peers' valuation drops significantly after going public. These findings are uniquely predicted by a model in which managers learn information from their peers' valuation.

Suggested Citation

  • Thierry Foucault & Laurent Fresard, 2014. "Learning from peers' stock prices and corporate investment," Post-Print hal-00977071, HAL.
    • Handle: RePEc:hal:journl:hal-00977071
    DOI: 10.1016/j.jfineco.2013.11.006
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hong, Harrison & Torous, Walter & Valkanov, Rossen, 2007. "Do industries lead stock markets?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 367-396, February.
    2. Enrichetta Ravina & Paola Sapienza, 2010. "What Do Independent Directors Know? Evidence from Their Trading," NBER Chapters, in: Corporate Governance, National Bureau of Economic Research, Inc.
    3. Lior Menzly & Oguzhan Ozbas, 2010. "Market Segmentation and Cross‐predictability of Returns," Journal of Finance, American Finance Association, vol. 65(4), pages 1555-1580, August.
    4. repec:oup:rfinst:v:25:y::i:11:p:3305-3350 is not listed on IDEAS
    5. Art Durnev & Randall Morck & Bernard Yeung, 2004. "Value-Enhancing Capital Budgeting and Firm-specific Stock Return Variation," Journal of Finance, American Finance Association, vol. 59(1), pages 65-105, February.
    6. Thierry Foucault & Laurent Frésard, 2012. "Cross-Listing, Investment Sensitivity to Stock Price, and the Learning Hypothesis," The Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3305-3350.
    7. Foucault, Thierry & Gehrig, Thomas, 2008. "Stock price informativeness, cross-listings, and investment decisions," Journal of Financial Economics, Elsevier, vol. 88(1), pages 146-168, April.
    8. Fang, Vivian W. & Noe, Thomas H. & Tice, Sheri, 2009. "Stock market liquidity and firm value," Journal of Financial Economics, Elsevier, vol. 94(1), pages 150-169, October.
    9. Qi Chen & Itay Goldstein & Wei Jiang, 2007. "Price Informativeness and Investment Sensitivity to Stock Price," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 619-650.
    10. Itay Goldstein & Alexander Guembel, 2008. "Manipulation and the Allocational Role of Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(1), pages 133-164.
    11. Dow, James & Gorton, Gary, 1997. "Stock Market Efficiency and Economic Efficiency: Is There a Connection?," Journal of Finance, American Finance Association, vol. 52(3), pages 1087-1129, July.
    12. Avanidhar Subrahmanyam & Sheridan Titman, 1999. "The Going‐Public Decision and the Development of Financial Markets," Journal of Finance, American Finance Association, vol. 54(3), pages 1045-1082, June.
    13. Lauren Cohen & Andrea Frazzini, 2008. "Economic Links and Predictable Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1977-2011, August.
    14. Yuanzhi Luo, 2005. "Do Insiders Learn from Outsiders? Evidence from Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 60(4), pages 1951-1982, August.
    15. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    16. Tor-Erik Bakke & Toni M. Whited, 2010. "Which Firms Follow the Market? An Analysis of Corporate Investment Decisions," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1941-1980.
    17. Timothy F. Bresnahan & Paul Milgrom & Jonathan Paul, 1992. "The Real Output of the Stock Exchange," NBER Chapters, in: Output Measurement in the Service Sectors, pages 195-216, National Bureau of Economic Research, Inc.
    18. Kewei Hou, 2007. "Industry Information Diffusion and the Lead-lag Effect in Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1113-1138.
    19. Joel Peress, 2010. "Product Market Competition, Insider Trading, and Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 65(1), pages 1-43, February.
    20. Rui Albuquerque & Eva De Francisco & Luis B. Marques, 2008. "Marketwide Private Information in Stocks: Forecasting Currency Returns," Journal of Finance, American Finance Association, vol. 63(5), pages 2297-2343, October.
    21. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2002. "Dynamic Volume-Return Relation of Individual Stocks," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1005-1047.
    22. Zvi Griliches, 1992. "Output Measurement in the Service Sectors," NBER Books, National Bureau of Economic Research, Inc, number gril92-1, March.
    23. Richard J. Gilbert & Marvin Lieberman, 1987. "Investment and Coordination in Oligopolistic Industries," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 17-33, Spring.
    24. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    25. Heather E. Tookes, 2008. "Information, Trading, and Product Market Interactions: Cross‐sectional Implications of Informed Trading," Journal of Finance, American Finance Association, vol. 63(1), pages 379-413, February.
    26. Siew Hong Teoh & Ivo Welch & T.J. Wong, 1998. "Earnings Management and the Long-Run Market Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 53(6), pages 1935-1974, December.
    27. Ferreira, Daniel & Ferreira, Miguel A. & Raposo, Clara C., 2011. "Board structure and price informativeness," Journal of Financial Economics, Elsevier, vol. 99(3), pages 523-545, March.
    28. Easley, David, et al, 1996. "Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-1436, September.
    29. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bennett, Benjamin & Stulz, René & Wang, Zexi, 2020. "Does the stock market make firms more productive?," Journal of Financial Economics, Elsevier, vol. 136(2), pages 281-306.
    2. Thierry Foucault & Laurent Fresard, 2019. "Corporate Strategy, Conformism, and the Stock Market," The Review of Financial Studies, Society for Financial Studies, vol. 32(3), pages 905-950.
    3. Fujun Lai & Qian Wang & Qingxiang Feng, 2019. "Does Chinese Financial Market Information Promote Listed Manufacturing Firms’ Productivity?," Sustainability, MDPI, vol. 11(2), pages 1-20, January.
    4. Hamdi Ben-Nasr & Abdullah Alshwer, 2015. "How Informed Stock Trading Can Affect Labor Investment Efficiency," Proceedings of Business and Management Conferences 2304077, International Institute of Social and Economic Sciences.
    5. Ben-Nasr, Hamdi & Alshwer, Abdullah A., 2016. "Does stock price informativeness affect labor investment efficiency?," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 249-271.
    6. Xu, Liang, 2021. "Stock price informativeness and managerial inefficiency," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 348-364.
    7. De Cesari, Amedeo & Huang-Meier, Winifred, 2015. "Dividend changes and stock price informativeness," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 1-17.
    8. Pereira da Silva, Paulo, 2021. "Do managers pay attention to the market? A review of the relationship between stock price informativeness and investment," Journal of Multinational Financial Management, Elsevier, vol. 59(C).
    9. Tse-Chun Lin & Qi Liu & Bo Sun, 2015. "Contracting with Feedback," International Finance Discussion Papers 1143, Board of Governors of the Federal Reserve System (U.S.).
    10. Thierry Foucault & Laurent Frésard, 2012. "Cross-Listing, Investment Sensitivity to Stock Price, and the Learning Hypothesis," The Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3305-3350.
    11. Itay Goldstein, 2023. "Information in Financial Markets and Its Real Effects," Review of Finance, European Finance Association, vol. 27(1), pages 1-32.
    12. Aliyev, Nihad & Huseynov, Fariz & Rzayev, Khaladdin, 2022. "Algorithmic trading and investment-to-price sensitivity," LSE Research Online Documents on Economics 118844, London School of Economics and Political Science, LSE Library.
    13. Bibo Liu & Xuan Tian, 2022. "Do Venture Capital Investors Learn from Public Markets?," Management Science, INFORMS, vol. 68(10), pages 7274-7297, October.
    14. Steven Chong Xiao, 2020. "Do Noisy Stock Prices Impede Real Efficiency?," Management Science, INFORMS, vol. 66(12), pages 5990-6014, December.
    15. Houdou Basse Mama, 2017. "The interaction between stock prices and corporate investment: is Europe different?," Review of Managerial Science, Springer, vol. 11(2), pages 315-351, March.
    16. Goldstein, Itay & Yang, Liyan, 2019. "Good disclosure, bad disclosure," Journal of Financial Economics, Elsevier, vol. 131(1), pages 118-138.
    17. Todea Anita, 2018. "Financial Literacy and Stock Price Informativeness: a Cross-Country Study," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 63(1), pages 63-72, April.
    18. Bai, Jennie & Philippon, Thomas & Savov, Alexi, 2016. "Have financial markets become more informative?," Journal of Financial Economics, Elsevier, vol. 122(3), pages 625-654.
    19. Cheung, William Ming Yan & Im, Hyun Joong & Selvam, Srinivasan, 2023. "Stock liquidity and investment efficiency: Evidence from the split-share structure reform in China," Emerging Markets Review, Elsevier, vol. 56(C).
    20. Itay Goldstein & Shijie Yang & Luo Zuo, 2020. "The Real Effects of Modern Information Technologies: Evidence from the EDGAR Implementation," NBER Working Papers 27529, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Corporate investment; Managerial learning; Peers; Informed trading;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-00977071. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.