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Stock market-driven investment: new evidence on information, financing and agency effects

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  • Scott Fung
  • Shih-Chuan Tsai

Abstract

This study provides a theoretical model and empirical analysis to jointly examine the information, financing and agency effects, the three channels through which the stock market can actively influence corporate investment decisions and firm performance. First, stock market affects corporate investments, and such impact varies with different market valuation measures, types of investments and firm characteristics. Second, stock market valuation affects investments through the channel of corporate financing, supporting the financing hypothesis. Third, stock market-driven investments have differential impacts on the future operating performance of firms. Investments driven by market valuation of firm-specific information have a positive effect on future performance. In contrast, investments driven by market-wide sentiment have a negative effect on future performance. Fourth, consistent with the information hypothesis, market-driven investments are value-enhancing for firms with better external monitoring by analysts and institutional investors. Lastly, consistent with the agency hypothesis, market-driven investments are value-destroying when firms lack external monitoring, proper managerial incentives and independent board of directors.

Suggested Citation

  • Scott Fung & Shih-Chuan Tsai, 2015. "Stock market-driven investment: new evidence on information, financing and agency effects," Applied Economics, Taylor & Francis Journals, vol. 47(27), pages 2821-2843, June.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:27:p:2821-2843
    DOI: 10.1080/00036846.2015.1011306
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    Cited by:

    1. Quynh Trang Phan & Poomthan Rangkakulnuwat, 2022. "How price informativeness affects the sensitivity of investment-to-stock price in Vietnamese listed firms," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 12(1), pages 28-61.
    2. Wang, Jiangyuan & Wang, Hua & Wang, Di, 2021. "Equity concentration and investment efficiency of energy companies in China: Evidence based on the shock of deregulation of QFIIs," Energy Economics, Elsevier, vol. 93(C).

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