Asymmetric information, firm investment and stock prices

Abstract

Purpose

The purpose of this paper is to explore the relations of investment and stock prices (Tobin‐Q), the impact of asymmetric information on the investment sensitivity to stock price, and the impact of asymmetric information on the stock price sensitivity to investment.

Design/methodology/approach

Research was conducted with 313 listed companies and 1,878 firm‐year observations from Chinese stock market. Empirical studies were conducted based on two hypotheses by using R², information delay and scores of information disclosure as measures of asymmetric information and taking changes in book assets and capital expenditures scaled by book assets as measures of investment.

Findings

The key findings of the paper are: managers are learning from the market when they make investment decisions; the asymmetric information has a significant negative impact on the investment sensitivity to stock price; and the asymmetric information has a significant positive impact on the stock price sensitivity to investment.

Practical implications

The paper has a significant practical implication for regulation policy making in stock market.

Originality/value

The paper fills the research gap in two points. It studies the impact of asymmetric information on the investment sensitivity to stock price, and the impact of asymmetric information on the stock price sensitivity to investment in Chinese stock market for the first time.

Citation

Kong, D., Xiao, T. and Liu, S. (2011), "Asymmetric information, firm investment and stock prices", China Finance Review International, Vol. 1 No. 1, pp. 6-33. https://doi.org/10.1108/20441391111092246