Learning from Peers’ Prices and Corporate Investment under the Influence of Shocks

Marco Bade^1,

¹Berlin Institute of Technology, Chair of Finance and Investment, Straße des 17. Juni 135, Berlin

Cite this paper:
Marco Bade. Learning from Peers’ Prices and Corporate Investment under the Influence of Shocks. Journal of Finance and Economics. 2016; 4(5):156-165. doi: 10.12691/jfe-4-5-5

Abstract

This paper presents a model with endogenous information acquisition when peers’ valuation matters for investments. It is shown that peers’ stock prices guide private investments but become less informative when decision makers trade on private information. Private information production and trading in the secondary market reduce market liquidity and thus aggravate the impact of noise-creating participation shocks on price informativeness. However, noise also provides camouflage and enables decision makers to generate trading profits at the expense of uninformed traders. There is a tradeoff between trading profit as a source for liquidity and investment efficiency.

Keywords:
information acquisition informational feedback peers noise price informativeness investment efficiency

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