Learning from Peers' Stock Prices and Corporate Investment

Foucault, Thierry; Frésard, Laurent

doi:10.2139/ssrn.2117150

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Learning from Peers' Stock Prices and Corporate Investment

Journal of Financial Economics (JFE), Forthcoming

67 Pages Posted: 26 Jul 2012 Last revised: 27 Aug 2013

See all articles by Thierry Foucault

Laurent Frésard

Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute

Date Written: August 27, 2013

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 prices 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.

Keywords: Corporate Investment, Managerial Learning, Peers, Informed Trading

JEL Classification: G31, D21, D83

Suggested Citation: Suggested Citation

Foucault, Thierry and Frésard, Laurent, Learning from Peers' Stock Prices and Corporate Investment (August 27, 2013). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2117150 or http://dx.doi.org/10.2139/ssrn.2117150