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.
The PDF above is a pre-copy-editing, author-produced PDF of the article published in the Review of Financial Studies following peer review. The definitive publisher-authenticated version is available online at: < http://dx.doi.org/10.1093/rfs/hhl024 >.
Chen, Qi, Itay Goldstein, and Wei Jiang. "Price Informativeness and Investment Sensitivity to Stock Price." Review of Financial Studies 20, no. 3 (May 2007): 619-650.
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