Title

Do Managers Listen to the Market?

Publication Date

10-28-2004

Abstract

There are competing theories as to whether managers learn from stock prices. Dye and Sridhar (2002), for example, argue that capital markets can be better informed than the firm itself, while Roll (1986) argues managers may ignore market signals due to hubris. In this paper, we examine whether managers listen to the market in making major corporate investments, and whether agency costs and corporate governance mechanisms help explain managers' propensity to listen. We find that, on average, managers listen to the market: they are more likely to cancel investments when the market reacts unfavorably to the related announcement. Further, we find mixed evidence consistent with the notion that managers' propensity to listen is related to agency costs. We find that firms tend to listen to the market more when more of their shares are held by large blockholders, and when their CEOs have higher pay-performance sensitivities.

Document Type

Article

Keywords

Agency costs, information markets, investment decisions, merger, acquisition, learning

Disciplines

Finance

DOI

10.2139/ssrn.610062

Source

SMU Cox: Finance (Topic)

Language

English

Share

COinS