Strategic information aggregation and learning from prices

This paper studies firms' learning from stock prices and corporate investment when managers have different precisions about their investment opportunities. When informed traders and firm managers are strategic, private information is not fully incorporated into stock prices. Moreover, informed trading volume is low for firms with low quality of managerial information, leading to limited learning. Using a sample of U.S. publicly traded companies, the paper documents a positive correlation between the quality of managerial information and price informativeness. Furthermore, consistent with model predictions, the relation between managerial information and investment sensitivity to prices follows an inverse U-shape pattern.