The informational feedback effect of stock prices on corporate investments: A comparison of new energy firms and traditional energy firms in China

Abstract

Managers can learn useful information from their stock prices to make better decisions. In this study, we investigate whether managerial learning exists in new energy or traditional energy firms in China by examining the relation between stock price informativeness and investment-Q sensitivity. We find that stock price informativeness is positively and significantly associated with investment-Q sensitivity in new energy firms but no such association exists in traditional energy firms, suggesting that managerial learning is prominent only in new energy firms. We perform a group of supplementary tests to substantiate that managerial learning exists in new energy firms of China based on the Foucault and Fresard (2014)’s theoretical predictions. Moreover, we find the new energy firms with more informative stock prices are less likely to underinvest and in turn achieve better financial performances but no such relation for traditional energy firms. Our main results remain unchanged after accounting for endogeneity. Finally, we show the different growth prospects between new and traditional energy firms contribute to their different managerial learning behaviors to some extent. Overall, our work emphasizes the important role the stock market plays in promoting evolution of China's new energy industry from an undocumented perspective, i.e., the informational feedback channel.