THESIS
2015
x, 104 leaves : illustrations ; 30 cm
Abstract
This thesis examines the interaction between the financial market and corporate investment
on capital and inventory.
Chapter 1 develops and tests the hypothesis that privately held companies learn from the
stock market when making capital investment decisions. 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 in which
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 s...[
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This thesis examines the interaction between the financial market and corporate investment
on capital and inventory.
Chapter 1 develops and tests the hypothesis that privately held companies learn from the
stock market when making capital investment decisions. 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 in which
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.
Chapter 2 studies how financial constraints affect firms’ inventory investment behavior.
Financially more constrained firms hold substantially more inventory than do financially less contrained firms and also show much more volatility in inventory holdings. To understand
why, we model the interaction of financial constraints, capacity constraints, and the response of production and inventory to cost shocks. We develop several implications as to how
financial constraints affect the inventory response to cost shocks of constrained firms relative to unconstrained firms, which cannot be derived from any of a host of other ways in which
two groups of firms are differentiated in our model. We find very consistent results when we
take these implications to the real data.
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