Incentives for information production in markets where prices affect real investment

Dow, J and Goldstein, I and Guembel, A (2017) Incentives for information production in markets where prices affect real investment. Journal of the European Economic Association, 15 (4). pp. 877-909. ISSN 1452-4766

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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
Additional Information: This is the peer reviewed version of the following article: James Dow, Itay Goldstein, Alexander Guembel; Incentives for Information Production in Markets where Prices Affect Real Investment. Journal of the European Economic Association 2017 , which has been published in final form at https://doi.org/10.1093/jeea/jvw023. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving. © 2017 European Economic Association
Subjects: I > Investment appraisal
Subject Areas: Finance
DOI: 10.1093/jeea/jvw023
Date Deposited: 28 Nov 2016 16:09
Last Modified: 18 Aug 2017 15:53
URI: http://lbsresearch.london.edu/id/eprint/735

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