Ripple effects of noise on corporate investment
Event details
Date | 21.04.2016 |
Hour | 12:00 › 13:00 |
Speaker | Laurent FRESARD (University of Maryland) |
Location | |
Category | Conferences - Seminars |
Firms reduce investment in response to non-fundamental drops in the stock price of their product-market peers. This ripple effect is consistent with the idea that stock prices act as ``faulty informant'', i.e., managers rely on stock prices as a source of information but cannot perfectly filter out noise in these prices. This ripple effect is stronger when peers' stock prices are more informative, and is weaker when managers are better informed, as expected if stock prices provide faulty signals. Overall, non-fundamental variations in the stock price of some firms influence the investment decisions of other firms. This externality has implications for the allocation of resources in the economy, the transmission of financial shocks across firms, and the volatility of aggregate investment.
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