Director Networks and Learning from Stock Prices

Recent research finds that managers learn from stock prices when they make corporate investment decisions. We posit that the extent to which managers learn from stock prices depends not only on the informativeness of price, but also on their ability to access other sources of information. An important channel through which managers access external information is their director networks. Hence, a well-connected board can provide valuable information that diminishes the learning from stock prices, especially when prices impound limited private information. Consistent with our conjecture, we find that investment-to-price sensitivity is significantly lower in firms with more connected boards, and this effect is stronger when stock prices are less informative. We further find that well-connected firms are less likely to overinvest, especially when price is less informative. Taken together, these findings suggest that director networks play an important role in the informational feedback effect of stock prices and the information transmitted via the network can enhance investment efficiency particularly when learning from stock prices is limited.