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1、Learning from peers stock prices and corporate investment Thierry Foucault a n Laurent Fresardb aHEC Paris 1 rue de la Liberation 78351 Jouy en Josas France bRobert H Smith School of Business University of Maryland United States a r t i c l e i n f o Article history Received 28 March 2013 Received i
2、n revised form 23 July 2013 Accepted 4 August 2013 Available online 4 December 2013 JEL classification G31 D21 D83 Keywords Corporate investment Managerial learning Peers Informed trading a b s t r a c t Peers valuation matters for firms investment a one standard deviation increase in peers valuatio
3、n is associated with a 5 9 increase in corporate investment This association is stronger when a firm s stock price informativeness is lower or when its managers appear less informed Also the sensitivity of a firm s investment to its stock price is lower when its peers stock price informativeness is
4、higher or when demands for its products and its peers products are more correlated Furthermore the sensitivity of firms investment to their peers valuation drops significantly after going public These findings are uniquely predicted by a model in which managers learn information from their peers val
5、uation fax 33 1 39 67 70 85 E mail address foucault hec fr T Foucault 1 Subrahmanyam and Titman 1999 argue that stock prices are particularly useful to managers because they aggregate investors dis persed signals about future product demand This is the case for peers stock prices since product deman
6、ds for related firms are affected by common shocks e g Menzly and Ozbas 2010 show that firms Return on Assets ROAs are positively correlated with related firms ROAs Journal of Financial Economics 111 2014 554 577 If managers use their peers valuation to make invest ment decisions then firms investme
7、nt and their peers valuation should covary Evidence thereof is however insufficient to conclude that managers learn information from peers stock prices since stock prices and investment can covary due to unobserved factors To address this problem we rely on theory We consider a simple model in which
8、 peers valuation complements managers knowledge about their invest ment opportunities 2In this model a firm sells a product for which demand is uncertain and correlated with the demand for another firm s product its peer 3The firm s manager must decide whether to expand production capacity or not Th
9、is growth opportunity has a positive net present value only if future demand for the firm s product is strong enough As investors trade on private information about future demand the firm s stock price and its peer s stock price provide signals to the manager in addition to his own private informati
10、on about the net present value of the growth opportunity We compare three different scenarios i the manager ignores stock market information no managerial learning ii the manager only relies on his own stock price narrow managerial learning and iii the manager uses the information contained in each
11、stock price learning from peers When the manager ignores stock prices the firm s investment and stock prices covary because the manager s private signal and investors signals are correlated This correlated information channel also operates when the manager learns information from stock prices Howeve
12、r in this case it is supplemented by the fact that stock prices influence the manager s decision Thus in each scenario we split the covariance between the investment of a firm and a its own stock price or b its peer stock price into two parts one due to the correlated information channel and another
13、 one due to the learning channel We exploit the fact that some firms characteristics affect differently these two parts to develop null hypotheses specific to the learning from peers scenario Consider first the informativeness of a firm s own stock price If the firm s manager ignores the information
14、 in stock prices this informativeness does not affect the covariation between the firm s investment and its peer stock price If instead the firm s manager learns informa tion from stock prices then an increase in the firm s own stock price informativeness reduces the sensitivity of its investment to
15、 its peer stock price prediction 1 Indeed as the signal conveyed by its own stock price becomes more informative the manager s beliefs are less influenced by its peer stock price and therefore his investment decision is less sensitive to this price Symmetrically an increase in the informativeness of
16、 its peer stock price reduces the sensitivity of a firm s invest ment to its own stock price if the manager learns informa tion from its peer stock price prediction 2 but not otherwise The same prediction holds for an increase in the correlation of the fundamentals of a firm and its peer prediction 3 because other things equal this increase strengthens the informativeness of the peer stock price about the firm s future cash flows An increase in the quality of the manager s private informationimp
