Job Market Paper
Abstract: This paper develops a model of managers' learning in the context of investment decisions to dissect the factors contributing to investment-price sensitivity. In a model of a noisy expectation framework, managers and informed traders make optimal decisions based on the information signals they observe. I decompose the investment-price sensitivity into two sources of covariance: internal learning (already known to managers) and market learning (new to managers). This paper quantifies investment-price sensitivity decomposition using calibrated parameters matching U.S. firm's data. The findings are that roughly 54% of the investment-price sensitivity is attributed to managers' pre-existing internal information, while the remaining 46% arises from their learning in the stock market. The increase in investment-price sensitivity does not necessarily indicate more market learning. Furthermore, the analysis of the full disclosure scenario has implications for corporate disclosure policies, suggesting that an increase in disclosure could potentially hinder managers' learning from the financial market.