A Discussion by Alan Kirman of
« Information Aggregation and
Investment Decisions »
Elias Albagli, Christian Hellwig and
Aleh Tsyvinski
What is being modelled and what is
the modelling framework?
• The authors look at the price of a firm’s shares
and how information about the firm is integrated
into that price.
• The firm’s share price is related to the firm’s
investment decisions. Managers get information
from their share price.
• Given the assumptions the share price exceeds
the expected value of dividends.
• Not only a relation but a predictable one!
Older doubts
• When other determinants of investment are controlled
for, share prices do not seem to explain much of the
variation in investment in any of the G7 countries.
• For some countries, there is evidence that an estimate
of the component of share prices not related to
available information is correlated with investment to a
statistically significant degree. However, the magnitude
of this relationship is too small to be meaningful
economically, and the design of the tests are biased
towards such a finding. Tease OECD 1993
Some recent evidence
• « we find strong positive correlation between the amount
of private information in price and the investment-to-price
sensitivity. This relation is robust to the inclusion of controls
for managerial information, analyst coverage, capital
constraint, and firm size, as well as to a variety of different
specifications.
• Overall, our results are consistent with the hypothesis that
some information in price is new to managers and that
managers learn it from the price and incorporate it in their
investment decisions.The possibility that prices guide
managers in their investment decisions implies that
financial markets affect the real economy. »
• Chen et al. (2007) The Review of Financial Studies
Who has information about what?
• The « fundamental » value q of the firm is drawn
from a normal distribution
• There is a « demand shock »
• The continuum of shareholders each hold one
share and receive a signal which is drawn from a
normal distribution with mean q
• They decide whether to hold their share or to sell
and the market is equilibrated by setting their
supply equal to the uninformed demand which is
rationalised later in the paper.
A first question
• What is happening here is that information from
those outside the firm which the manager does
not have is getting incorporated into the signal.
• Although this basic idea is justified in a number of
recent papers (knowledge about demand or rival
products) how realistic is it to assume that the
large number of shareholders all receive
independent signals about the fundamentals?
• This recalls the comment by Poincaré on
Bachelier’s thesis
A warning
• Quand des hommes sont rapprochés, ils ne se décident plus
au hasard et indépendamment les uns des autres ; ils
réagissent les uns sur les autres. Des causes multiples entrent
en action, et elles troublent les hommes, les entraînent à
droite et à gauche, mais il y a une chose qu'elles ne peuvent
détruire, ce sont leurs habitudes de moutons de Panurge. Et
c'est cela qui se conserve
Henri Poincaré Report on Bachelier’s Ph D thesis 1900
7
This raises further questions
• Although this is a market for the shares of one
firm they are being sold on a market which is
cleared by an auctioneer, thus the mechanism
and timing of decisions is not taken into account
whereas shares are now traded through a CDA in
which there is continuous updating of the price
as a result of the trades of the individuals.
• Isn’t there a discrepancy between the time for
the forming of supply and that for investment
decisions?
Two key features
• First the price function must be invertible for
all of this to work
• The idea is that the marginal trader has to
have an increasing expected dividend to make
him willing to pay a higher price.
• This convexity will produce the wedge
between V(z) and P(z)
Two questions
• What happens next time? Shares have now
been transferred to new people.
• Who are they and how will they now behave?
• What would happen if the actors in this story
read the paper?