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Noisy Stock Prices and Corporate Investment

Author

Listed:
  • Olivier Dessaint

    (University of Toronto - Rotman School of Management)

  • Thierry Foucault

    (HEC Paris - Finance Department)

  • Laurent Frésard

    (University of Lugano; Swiss Finance Institute; University of Maryland - Robert H. Smith School of Business)

  • Adrien Matray

    (Princeton University)

Abstract

Firms significantly reduce their investment in response to non-fundamental drops in the stock price of their product-market peers. We argue that this result arises because of managers' limited ability to filter out the noise in stock prices when using them as signals about their investment opportunities. The resulting losses of capital investment and shareholders' wealth are economically large, and affect even firms that are not facing severe financing constraints or agency problems. Our findings offer a novel perspective on how stock market inefficiencies can affect the real economy, even in the absence of financing or agency frictions.

Suggested Citation

  • Olivier Dessaint & Thierry Foucault & Laurent Frésard & Adrien Matray, 2018. "Noisy Stock Prices and Corporate Investment," Swiss Finance Institute Research Paper Series 18-73, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1873
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