Many empirical papers study the correlation between stock prices and investment. However, there is very little direct analysis on the relative merits of the possible explanations offered in the literature to this correlation. Such an analysis can be conducted cross-sectionally by studying which firms have stronger sensitivity of investment to stock price. In this paper, in addition to test empirically whether price informativeness has an important role in generating the correlation between stock prices and real investment, we also emphasize that financial constraints factor may result in stronger correlation. Both price informativeness and financial constraints do not affect investment sensitivity to stock price independently. We argue that price informativeness may point to an active role of prices in determining investment, i.e., prices reflect some information that is not known to managers. We find that financial constraints may influence whether managers will utilize this channel to increase their shareholders' wealth.
Relation:
管理與系統 / Journal of Management & Systems,12(4),55-78.
