Abstract:*

We study the implications of the "feedback effect" when a firm's investment decision affects its exposure to a systematic risk factor. As a leading example, we consider a manager's decision to invest in a "green" project based on her firm's stock price. The firm's price conveys information regarding both the project's cash ows and its discount rate, which depends on its factor exposure. The interaction between the firm's investment and its factor exposure yields novel predictions about the likelihood of investment, expected returns, and future profitability. Moreover, while feedback makes investment more informationally e cient, it can reduce investor welfare.

*Co-authored with S. Banerjee (Rady School of Management) and K. Smith (Stanford University)

General information

This will be a hybrid seminar. If you are interested in joining this seminar, please send an email to the secretariat of the Finance Group at Amsterdam Business School at finsec-abs@uva.nl.