Incentives for Information Production in Markets where Prices Affect Real Investment

Dow, James, Goldstein, Itay and Guembel, Alexander (2017) Incentives for Information Production in Markets where Prices Affect Real Investment. Journal of the European Economic Association, 15 (4). pp. 877-909.

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Official URL: http://tse-fr.eu/pub/28249

Abstract

We analyze information production incentives for traders in financial markets, when firms condition investment decisions on information revealed through stock prices. We show that traders’ private value of information about a firm’s investment project increases with the ex ante likelihood the project will be undertaken. This generates an informational amplification effect of shocks to firm value. Information production by traders may exhibit strategic complementarities for projects that would not be undertaken in the absence of positive news from the stock market. A small decline in fundamentals can lead to a market breakdown where information production ceases, and investment and firm value collapse. Our theory sheds light on how productivity shocks are amplified over the business cycle.

Item Type: Article
Language: English
Date: 2017
Refereed: Yes
JEL codes: E32 - Business Fluctuations; Cycles
G14 - Information and Market Efficiency; Event Studies
G31 - Capital Budgeting; Fixed Investment and Inventory Studies
Subjects: B- ECONOMIE ET FINANCE
B- ECONOMIE ET FINANCE > B5- Finances
Divisions: TSE-R (Toulouse), TSM Research (Toulouse)
Site: UT1
Date Deposited: 23 Feb 2017 11:08
Last Modified: 10 Apr 2018 13:23
OAI ID: oai:tse-fr.eu:28249
URI: http://publications.ut-capitole.fr/id/eprint/23076

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