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.
- Bradyn Breon-Drish (UC San Diego Rady School of Management)
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