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The source of information in prices and investment-price sensitivity

Author

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  • Edmans, Alex
  • Jayaraman, Sudarshan
  • Schneemeier, Jan
Abstract
This paper shows that real decisions depend not only on the total amount of information in prices, but the source of this information—a manager learns from prices when they contain information not possessed by him. We use the staggered enforcement of insider trading laws across 27 countries as a shock to the source of information that leaves total information unchanged: enforcement reduces (increases) managers’ (outsiders’) contribution to the stock price. Consistent with the predictions of our theoretical model, enforcement increases investment-q sensitivity, even when controlling for total price informativeness. The effect is larger in industries where learning is likely to be stronger, and in emerging countries where outsider information acquisition rises most post-enforcement. Enforcement does not increase the sensitivity of investment to cash flow, a non-price measure of investment opportunities. These findings suggest that extant measures of price efficiency should be rethought when evaluating real efficiency. More broadly, our paper provides causal evidence that managers learn from prices, by using a shock to price informativeness.

Suggested Citation

  • Edmans, Alex & Jayaraman, Sudarshan & Schneemeier, Jan, 2017. "The source of information in prices and investment-price sensitivity," Journal of Financial Economics, Elsevier, vol. 126(1), pages 74-96.
    • Handle: RePEc:eee:jfinec:v:126:y:2017:i:1:p:74-96
    DOI: 10.1016/j.jfineco.2017.06.017
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial efficiency; Real efficiency; Real effects of financial markets; Insider trading;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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