Abstract
The main objectives of this study are to examine the impact of stock price performance on firm’s investment and to investigate the counter impact of changes in investment expenditures on stock price performance. The random effects model was applied on the panel data of Chinese manufacturing firms listed at the Shanghai Stock Exchange and the Shenzhen Stock Exchange during the period 2002 to 2016. The sample contains 398 firms with 5,970 observations. Although there is a statistically significant and negative relationship between stock price and investment expenditures, the impact of stock price on investment expenditures is far greater than that of investment expenditures on stock price. Information asymmetry positively mediates both investment sensitivity to stock prices and stock prices sensitivity to investment. This study is a valuable contribution toward the analysis of investment decision making by manufacturing firms in China. It also provides guidelines for investors to assess the informational status of the capital market before making investment decisions and to comprehensively understand the different decisions made by firms with regard to the issue of new stocks and the indirect information attached with such issues.
Highlights
The study of corporate investment has become an interesting topic for researchers after the introduction of irrelevance theorem (Modigliani & Miller, 1958)
We empirically study the impact of stock price movement on firm investment and the feedback of firm investment expenditure under the asymmetric information market environment, which is a factor contributing to the decision-making of investors and managers in developing countries
From the above discussion on the relation between information asymmetry and investment, we propose the following hypotheses: Hypothesis 1a (H1a): Stock prices have a significant impact on firm investment
Summary
The study of corporate investment has become an interesting topic for researchers after the introduction of irrelevance theorem (Modigliani & Miller, 1958). In a well-known theorem called the Fisher separation theorem, it is supposed that the capital market is perfect and free of frictions and that the capital structure and investment decisions are independent when the cost of finance from external and internal sources is constant. This theorem is no longer considered valid and has been challenged and negated by researchers (starting from the work of Myers & Majluf, 1984). They believe that good investment can ensure the smooth operation and success of a business, but oppose the existence of perfect capital market
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