How Distorting are Stock Market Valuations Really to Corporate Investment?

We study mechanisms whereby stock market valuations may color corporate investment by using European firm-level data. We find that managers vicariously learn from stock prices when making investment decisions. Specifically, managers’ propensity to learn increases in stock price informativeness. Moreover, the route of investor sentiment transmission to investment runs substantially through the catering channel. While opaque firms are more likely to cater, evidence for the equity issuance hypothesis is confined to large, transparent and constrained firms. Finally, bubbly markets are associated with vigorous investment episodes but unexpectedly neither the 2001-2003 recession nor the subprime crisis induced significant cuts in investment.