Which prices to learn from? A new test of the managerial learning hypothesis

Abstract

We test the managerial learning hypothesis that company managers learn from informative stock prices when making corporate investment decisions. We employ the unique cross-listings of a firm’s dual share types (A-shares traded in domestic bourses predominantly by domestic retail investors and H-shares traded mainly by international institutional investors) as a laboratory. These distinct investor bases arising from regulatory restrictions result in more informative Hshare prices than A-share prices of the same company. Exploiting this largely exogenous difference in price informativeness, we compare firms’ investment sensitivity to H-share and Ashare prices, and find that firms’ investment is sensitive to H-share prices but is largely unaffected by A-share prices. The result survives several robustness checks including an analysis exploiting a policy change for identification. Investment sensitivity to H-shares is more pronounced when H-share prices are likely to be more informative and when managerial incentives are stronger, but weaker when company managers are more informed. Consistent with informative prices enabling managers to make better investment decisions, more informative prices are associated with better subsequent operating performance. Overall, our results are consistent with the managerial learning hypothesis.