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Price Informativeness and Investment Sensitivity to Stock Price

Author

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  • Qi Chen
  • Itay Goldstein
  • Wei Jiang

Abstract

The article shows that two measures of the amount of private information in stock price—price nonsynchronicity and probability of informed trading (PIN)—have a strong positive effect on the sensitivity of corporate investment to stock price. Moreover, the effect is robust to the inclusion of controls for managerial information and for other information-related variables. The results suggest that firm managers learn from the private information in stock price about their own firms’ fundamentals and incorporate this information in the corporate investment decisions. We relate our findings to an alternative explanation for the investment-to-price sensitivity, namely that it is generated by capital constraints, and show that both the learning channel and the alternative channel contribute to this sensitivity.

Suggested Citation

  • Qi Chen & Itay Goldstein & Wei Jiang, 2007. "Price Informativeness and Investment Sensitivity to Stock Price," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 619-650.
    • Handle: RePEc:oup:rfinst:v:20:y:2007:i:3:p:619-650.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhl024
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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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