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Asymmetric information, firm investment and stock prices

Author

Listed:
  • Dongmin Kong
  • Tusheng Xiao
  • Shasha Liu

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 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.

Suggested Citation

  • Dongmin Kong & Tusheng Xiao & Shasha Liu, 2010. "Asymmetric information, firm investment and stock prices," China Finance Review International, Emerald Group Publishing, vol. 1(1), pages 6-33, October.
  • Handle: RePEc:eme:cfripp:v:1:y:2010:i:1:p:6-33
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    References listed on IDEAS

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    1. 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.
    2. James Dow, 2003. "Informed Trading, Investment, and Welfare," The Journal of Business, University of Chicago Press, vol. 76(3), pages 439-454, July.
    3. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    4. 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.
    5. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    6. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    7. Isabelle Huault & V. Perret & S. Charreire-Petit, 2007. "Management," Post-Print halshs-00337676, HAL.
    8. repec:wsi:qjfxxx:v:04:y:2014:i:04:n:s2010139214500189 is not listed on IDEAS
    9. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    10. Patrick J. Kelly, 2014. "Information Efficiency and Firm-Specific Return Variation," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(04), pages 1-44.
    11. 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.
    12. 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.
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