How Does Price Informativeness Affect Investment Sensitivity to Stock Price?

This paper studies a feedback model with both managerial learning and speculator learning. In equilibrium, stock price informativeness equals the product of speculator private in- formation precision and supply shock precision; hence, market efficiency increases in either precision. These two different precisions, however, have different effects on investment- price sensitivity, due to the race between managerial learning and speculator learning. Investment-price sensitivity may decrease globally in speculator private signal precision, but first increase then decrease in supply shock precision. Also, investment becomes insensitive to price when supply shock is extremely volatile but remains significantly sensitive to price when speculators’ private signals become almost uninformative.