IDEAS home Printed from
   My bibliography  Save this article

Capital Market Imperfections and the Sensitivity of Investment to Stock Prices


  • Ovtchinnikov, Alexei V.
  • McConnell, John J.


Prior studies argue that investment by undervalued firms that require external equity is particularly sensitive to stock prices in irrational capital markets. We present a model in which investment can appear to be more sensitive to stock prices when capital markets are rational, but subject to imperfections such as debt overhang, information asymmetries, and financial distress costs. Our empirical tests support the rational (but imperfect) capital markets view. Specifically, investment–stock price sensitivity is related to firm leverage, financial slack, and probability of financial distress, but is not related to proxies for firm undervaluation. Because, in our model, stock prices reflect the net present values (NPVs) of investment opportunities, our results are consistent with rational capital markets improving the allocation of capital by channeling more funds to firms with positive NPV projects.

Suggested Citation

  • Ovtchinnikov, Alexei V. & McConnell, John J., 2009. "Capital Market Imperfections and the Sensitivity of Investment to Stock Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(03), pages 551-578, June.
  • Handle: RePEc:cup:jfinqa:v:44:y:2009:i:03:p:551-578_99

    Download full text from publisher

    File URL:
    File Function: link to article abstract page
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. repec:eee:corfin:v:47:y:2017:i:c:p:236-252 is not listed on IDEAS
    2. Park, Kwangho & Yang, Insun & Yang, Taeyong, 2017. "The peer-firm effect on firm’s investment decisions," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 178-199.
    3. Smith, Jason, 2014. "Does the market matter for more than investment?," Journal of Empirical Finance, Elsevier, vol. 25(C), pages 52-61.

    More about this item


    Access and download statistics


    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:cup:jfinqa:v:44:y:2009:i:03:p:551-578_99. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.