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RFS Advance Access originally published online on July 6, 2006
Review of Financial Studies 2007 20(3):619-650; doi:10.1093/rfs/hhl024
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Price Informativeness and Investment Sensitivity to Stock Price

Qi Chen
Fuqua School of Business, Duke University

Itay Goldstein
Wharton School, University of Pennsylvania

Wei Jiang
Columbia Business School

Address correspondence to Itay Goldstein, Wharton School, University of Pennsylvania, 2300 Steinberg Hall - Dietrich Hall, 3620 Locust Walk, Philadelphia, PA 19104, or e-mail: itayg{at}wharton.upenn.edu.

The article shows that two measures of the amount of private information in stock price—price nonsynchronicity and probability of informed trading (PIN)—have a strong positive effect on the sensitivity of corporate investment to stock price. Moreover, the effect is robust to the inclusion of controls for managerial information and for other information-related variables. The results suggest that firm managers learn from the private information in stock price about their own firms’ fundamentals and incorporate this information in the corporate investment decisions. We relate our findings to an alternative explanation for the investment-to-price sensitivity, namely that it is generated by capital constraints, and show that both the learning channel and the alternative channel contribute to this sensitivity. (JEL G14, G31)


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