PRODUCT MARKET THREAT AND STOCK PRICE INFORMATIVENESS

Abstract

There are two opposing hypotheses regarding the informative role of stock prices. The first hypothesis argues that the stock market is merely a sideshow where security prices reflect the consequences of managers’ decisions for firms’ cash flows but do not influence them. In other words, trading in secondary markets has no direct impact on firms’ decisions. The second, known as the “active informant hypothesis”, states that security prices influence managers’ real decisions because some investors trade on private information not available to managers, who therefore rely on stock prices as a source of information. There is recent evidence supporting the latter hypothesis. In order to help elucidate this current debate, this dissertation examines the stock price informativeness of firms facing a product market threat and competition from their peers. I reason that when facing a threat, managers of firms tend to be more inquisitive about their price stock movements and also about the stock price movements of their peers. Indeed, my empirical analyses show that managers of firms facing higher product market threat and competition are more sensitive to the information contained in their stock prices. I also find that firms learn more from their peers’ stock price movements as the level threat is greater except when the threat is at its highest level.