The Effect of Stock Prices on Real Investment in the Vertical Supply Chain

Speed Matters: Limited Attention and Supply-Chain Information Diffusion

“…First, we confirm the findings of Chen, Goldstein, and Jiang (2007) and Williams and Xiao (2016) at the quarterly frequency. If suppliers rely on their own stock prices to guide their investment decisions, we should find a positive relationship between supplier investments and supplier Tobin's Q, i.e., 1 > 0, after controlling for cash constraints and access to capital.…”

“…Chen, Goldstein, and Jiang (2007) show that managers learn from their own stock prices when making investment decisions. Foucault and Frésard (2014) and Williams and Xiao (2016) provide evidence for a broader price-feedback channel suggesting that firms also use information contained in stock prices of closely-related firms, such as peers and principal customers. In this section, we examine how the speed of information diffusion from customer to supplier stock prices can potentially affect supplier managers' reliance on their own versus their customers' stock prices as information sources.…”

“…If suppliers rely on their own stock prices to guide their investment decisions, we should find a positive relationship between supplier investments and supplier Tobin's Q, i.e., 1 > 0, after controlling for cash constraints and access to capital. If supplier managers also use information contained in customer stock prices, as suggested by Williams and Xiao (2016) significant at the 1% level. This pattern is observed in all specifications irrespective of whether we use supplier asset growth or capital expenditures as the dependent variable in the regressions.…”

“…From the firm's perspective, Chen, Goldstein, and Jiang (2007) suggest that stock prices can act as information sources that guide corporate managerial decisions. In a supply-chain context, Williams and Xiao (2016) show that managers of supplier firms use customer stock prices to guide their 1 The Cohen-Frazzini customer momentum trading strategy involves buying supplier firms whose customers had the most positive returns (highest quintile) in the previous month and short-selling firms whose customers had the most negative returns (lowest quintile). Cohen and Frazzini (2008) show that this strategy generates abnormal returns of 1.55% per month, or an annualized return of 18.6% per year.…”

The role of stock market in influencing firms’ investments in Jordan

“…5. Literature review Williams and Xiao (2015) investigate whether suppliers utilize information in their customers' stock prices to guide their investment decisions. The study findings suggest that investment decisions by other producers in the market may be affected by stock prices information.…”