Abstract
Do stock price increases influence firm-level investment decisions? Studies suggest that stock price movements may reflect adjustments in the beliefs of outsiders about the prospects of a firm and may therefore contain information or considerations that are new to the firm. However, it remains unclear if or when firms can use price movements as informational inputs in investment decisions as some suggest that the market is a sideshow, where trading is done with little or no impact on firm decisions, and that firms are better informed than outsiders about the value of their investments. This paper studies the firm and industry factors that influence a firm’s information environment, and thus, the informational relationship between stock prices and investments. We find that firm characteristics such as strategy uniqueness and complexity decrease the potential informativeness of stock prices for investment. In addition, higher analyst coverage and dedicated institutional investors negatively influence the relationship between stock prices and investment. Finally, industry context can shape how stock price changes can influence investments. Specifically, higher industry R&D intensity and competition decrease, and higher industry demand uncertainty increase the informativeness of stock prices for firms’ investment decisions.
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