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Managerial ability and investment to price sensitivity

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  • Shen, Jianghua
  • Xie, Lingmin

Abstract

This paper investigates how managerial ability influences their incentives to learn from stock prices, as measured by investment-q sensitivity. Our findings indicate a negative association between managerial ability and investment-q sensitivity. This relationship is more pronounced when firms' stock prices contain less investors’ private information. However, we do not find similar results using non-price-based measures of investment opportunities. Collectively, the results suggest that high-ability managers learn less information from stock prices when making investment decisions. To mitigate the endogeneity concern, we adopt chief executive officer (CEO) turnover as an exogenous shock to CEO ability and find consistent results. Additionally, we show that high-ability managers have more private information, suggesting that there is less information to be learned from stock prices.

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  • Shen, Jianghua & Xie, Lingmin, 2023. "Managerial ability and investment to price sensitivity," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 928-941.
    • Handle: RePEc:eee:reveco:v:88:y:2023:i:c:p:928-941
    DOI: 10.1016/j.iref.2023.07.024
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    Cited by:

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    2. Jeon, Heung-Jae & Jung, Sumi, 2024. "Generalist vs. Specialist CEOs: R&D Investment Sensitivity to Stock Price," Finance Research Letters, Elsevier, vol. 62(PA).

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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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