Proceedings of the 1st Business & Management Conference, Vienna

HOW INFORMED STOCK TRADING CAN AFFECT LABOR INVESTMENT EFFICIENCY

HAMDI BEN-NASR, ABDULLAH ALSHWER

Abstract:

In this paper, we examine whether managers use information included in stock prices when making labor investment decisions. Specifically, we examine whether stock price informativeness affects labor investment efficiency. We find that a higher probability of informed trading (PIN) is associated with lower deviations of labor investment from the level justified by economic fundamentals i.e., higher labor investment efficiency. This finding is robust to using alternative proxies for stock price informativeness and labor investment efficiency, when we control for earnings quality and mispricing, and when we address endogeneity issues. Furthermore, we examine how the impact of stock price informativeness on labor investment efficiency depends on labor union and financial constraints. Particularly, we find stock price informativeness helps mitigating the adverse effects of labor union and financial constraints on labor investment, respectively. Collectively, our results highlight the importance of information included in stock prices for the investment in human capital.

Keywords: Stock Price Informativeness, Private Information; Managerial learning, Investment Efficiency; Labor Investment; Corporate Governance

DOI: 10.20472/BMC.2015.001.004

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