Feedback from Stock Prices to Cash Flows
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- Author(s): Avanidhar Subrahmanyam, Sheridan Titman
- Published: Dec 17, 2002
- Pages: 2389-2413
- DOI: 10.1111/0022-1082.00409
Feedback from financial market prices to cash flows arises when a firm’s nonfinancial stakeholders, for example, its customers, employees, and suppliers, make decisions that are contingent on the information revealed by the price. Complementarities across stakeholders result in cascades, wherein relatively small stock price moves trigger substantial changes in asset values. This paper analyzes the relation between such feedback effects and parameters such as the information cost, the volatility of existing projects, the risk aversion of liquidity suppliers, and the precision of managerial information.