Corporate investment and stock market valuation

We study the driving forces behind the positive association observed between corporate investment and stock market valuation, and how they interact with managerial equity incentives and informativeness of investment. We build a dynamic model where managers use investment choices to influence investo...

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Bibliographic Details
Published in:Journal of business finance & accounting 2023-03, Vol.50 (3-4), p.795-819
Main Authors: Liao, Shushu, Errico, Marco
Format: Article
Language:English
Subjects:
compensation
Earnings
equity incentives
executives
financial report quality
Incentives
investment
investment informativeness
Investments
misvaluation
Ownership
Prospects
Securities markets
stock market
top management team
Valuation
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Summary:We study the driving forces behind the positive association observed between corporate investment and stock market valuation, and how they interact with managerial equity incentives and informativeness of investment. We build a dynamic model where managers use investment choices to influence investors' opinions about firms' future prospects and increase the market valuation. The incentives to manipulate the valuation processes increase with managerial equity incentives and informativeness of investment. Our empirical findings support the model's predictions that the tendency of using investment to boost market valuation is stronger when managerial stock ownership is high or when earnings quality is low (i.e., there is strong reliance on investment for information).
ISSN:1468-5957
0306-686X
1468-5957
DOI:10.1111/jbfa.12649