Stock market-driven investment: new evidence on information, financing and agency effects

Scott Fung, Shih Chuan Tsai

Research output: Contribution to journalArticle

Abstract

This study provides a theoretical model and empirical analysis to jointly examine the information, financing and agency effects, the three channels through which the stock market can actively influence corporate investment decisions and firm performance. First, stock market affects corporate investments, and such impact varies with different market valuation measures, types of investments and firm characteristics. Second, stock market valuation affects investments through the channel of corporate financing, supporting the financing hypothesis. Third, stock market-driven investments have differential impacts on the future operating performance of firms. Investments driven by market valuation of firm-specific information have a positive effect on future performance. In contrast, investments driven by market-wide sentiment have a negative effect on future performance. Fourth, consistent with the information hypothesis, market-driven investments are value-enhancing for firms with better external monitoring by analysts and institutional investors. Lastly, consistent with the agency hypothesis, market-driven investments are value-destroying when firms lack external monitoring, proper managerial incentives and independent board of directors.

Original languageEnglish
Pages (from-to)2821-2843
Number of pages23
JournalApplied Economics
Volume47
Issue number27
DOIs
Publication statusPublished - 2015 Jun 9

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Keywords

  • agency cost
  • corporate investment
  • information asymmetry
  • market valuation

ASJC Scopus subject areas

  • Economics and Econometrics

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