This paper shows that large cash reserves lead to systematic future market share gains at the expense of industry rivals. Using shifts in import tariffs to identify exogenous intensification of ...competition, difference-in-difference estimations support the causal impact of cash on product market performance. Moreover, the analysis reveals that the "competitive" effect of cash is markedly distinct from the strategic effect of debt on product market outcomes. This effect is stronger when rivals face tighter financing constraints and when the number of interactions between competitors is large. Overall, the results suggest that cash policy encompasses a substantial strategic dimension.
Cross-listed firms in the United States have a higher investment-to-price sensitivity than do firms that never cross-list. This difference is strong, does not exist prior to the cross-listing date, ...and does not vanish afterward. Moreover, it does not appear to be primarily driven by improvements in governance, disclosure, and access to capital associated with a U.S. crosslisting. Instead, we argue that a cross-listing enhances managers' reliance on stock prices because it makes stock prices more informative to them. Consistent with this explanation, U. S. cross-listings that are more likely to strengthen the informativeness of stock prices for managers feature a higher investment-to-price sensitivity.
Noisy Stock Prices and Corporate Investment Dessaint, Olivier; Foucault, Thierry; Frésard, Laurent ...
The Review of financial studies,
07/2019, Volume:
32, Issue:
7
Journal Article
Peer reviewed
Firms significantly reduce their investment in response to nonfundamental drops in the stock price of their product-market peers. We argue that this results stems from managers’ limited ability to ...filter out the noise in the stock prices when using them as signals about their investment opportunities. Ensuing losses of capital investment and shareholders’ wealth are economically large and even affect firms not facing severe financing constraints or agency problems. Our findings offer a novel perspective on how stock market inefficiencies can affect the real economy, even in the absence of financing or agency frictions.
We examine whether and how a US cross-listing mitigates the risk that insiders will turn their firm’s cash holdings into private benefits. We find strong evidence that the value investors attach to ...excess cash reserves is substantially larger for foreign firms listed on US exchanges and over-the-counter than for their domestic peers. Further, we show that this excess-cash premium stems not only from the strength of US legal rules and disclosure requirements, but also from the greater informal monitoring pressure that accompanies a US listing. Overall, because investors’ valuation of excess cash mirrors how they expect the cash to be used, our analysis shows that a US listing constrains insiders’ inefficient allocation of corporate cash reserves significantly.
Peers' valuation matters for firms' investment: a one standard deviation increase in peers' valuation is associated with a 5.9% increase in corporate investment. This association is stronger when a ...firm's stock price informativeness is lower or when its managers appear less informed. Also, the sensitivity of a firm's investment to its stock price is lower when its peers' stock price informativeness is higher or when demands for its products and its peers' products are more correlated. Furthermore, the sensitivity of firms' investment to their peers' valuation drops significantly after going public. These findings are uniquely predicted by a model in which managers learn information from their peers' valuation.
We investigate the role of industry specialization in horizontal cross-border mergers and acquisitions. We find that acquirers from more specialized industries in a country are more likely to buy ...foreign targets in countries that are less specialized in these same industries. The role of industry specialization in foreign acquisitions is more prevalent when contracting inefficiencies and exporting costs limit arm's-length relationships. The economic gains in cross-border deals are larger when specialized acquirers purchase assets in less specialized industries. These results are consistent with an internalization motive for foreign acquisitions, through which acquirers can apply localized intangibles on foreign assets.
We show that product differentiation reduces the informativeness of a firm’s stock price (or its peers’stock prices) about the value of its growth opportunities. This results in less efficient ...exercise of a firm’s growth options when managers rely on information in stock prices for their decisions. This informational cost of differentiation induces conformity in product market strategies and is larger for private firms. Hence, a firm should differentiate more after going public. We confirm this prediction empirically and show that the post-IPO increase in differentiation is stronger for firms with better informed managers or less informative peers’stock prices.
We study how product-market interactions affect investment. We use reductions of import tariffs to examine how incumbents modify investment when the threat of rivals’ entry intensifies. Incumbents ...reduce investment by 7.2% in response to higher entry threat. Consistent with a strategic behavior, the investment reduction varies across market structures: it concentrates in markets in which competitive actions are strategic substitutes, where deterring entry is costly and investment makes incumbents look soft. Our results provide novel evidence on how and why firms’ interactions influence corporate investment.
Received August 10, 2015; accepted December 1, 2015 by Editor Efraim Benmelech.
We examine the determinants of vertical acquisitions using product text linked to product vocabulary from input-output tables. We find that the innovation stage is important in understanding vertical ...integration. R & D-intensive firms are less likely to become targets of vertical acquisitions. In contrast, firms with patented innovation are more likely to sell to vertically related buyers. Firms’R & D intensity is a more important deterrent to their vertical acquisitions when the provision of innovation incentives by potential acquirers is more difficult. The role of patents in fostering vertical acquisitions is more prevalent when potential buyers face a higher risk of holdup.
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