DP11081 Ripple Effects of Noise on Corporate Investment

Author(s): Olivier Dessaint, Thierry Foucault, Laurent Frésard, Adrien Matray
Publication Date: January 2016
Keyword(s): informational efficiency, investment, learning, noise
JEL(s): G14, G31, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11081

Firms reduce investment in response to non-fundamental drops in the stock price of their product-market peers, as predicted by a model in which managers rely on stock prices as a source of information but cannot perfectly filter out noise in prices. The model also implies the response of investment to noise in peers' stock prices should be stronger when these prices are more informative, and weaker when managers are better informed. We find support for these predictions. Overall, our results highlight a new channel through which non-fundamental shocks to the stock prices of some firms influence real decisions of other firms.