We characterize the complex relation between corporate investment and stock price in a parsimonious setting featuring informational feedback loop. In equilibrium, both speculator private signal precision and random supply precision promote price informativeness, but they have heterogeneous effects on investment-price sensitivity, which arise from the race between managerial learning and speculator learning. Asymptotically, investment is insensitive to stock price as random supply becomes extremely volatile, but it is still sensitive to stock price when speculator private signals are almost pure noises. Globally, investment may be less sensitive to stock price for more informative speculator private signals, while its sensitivity to stock price may first increase then decrease as the random supply precision increases. In addition, price informativeness affects corporate investments even if stock price is fixed. These results provide new identification strategies for empirical tests of managerial learning.
|Publication status||In preparation - 13 Oct 2022|