Do Private Firms Learn from the Stock Market


Speaker


Abstract

This paper develops and tests the hypothesis that privately held companies learn from the stock market. Using a large panel data set for the United Kingdom, we find that private firms’ investment responds positively to the valuation of public firms in the same industry. The sensitivity is stronger in industries where the stock prices are more informative or firms are more likely to face common shocks. To address the concern that unobserved factors in the managers’ information set affect both private firms’ investment and industry valuation and generate a spurious relationship even in the absence of learning, we further show that the investment of private firms in the industry leaders’ major-segment industry reacts strongly to the valuation of industry leaders’ unrelated minor-segment industries. These findings are consistent with our model in which the stock market has real effects on the private sector through an information-spillover channel: private firm managers exploit information contained in the stock prices, but cannot completely filter out the irrelevant information.

This event is an Erasmus Finance Seminar. The Erasmus Finance Seminar series brings prominent researchers in Finance from all over the world to Rotterdam.