1. Comovement in Investment
(A. Knyazeva, D. Knyazeva, R. Morck, B. Yeung)
EFM Symposium
Comovement

2. Overview Motivation and background The argument Data and results
Conclusions and future work
Comovement

3. Background: related work
Herding
Return comovement. Morck, Yeung, & Yu 2000
Distortions in firm investment: low sensitivity to value added, high sensitivity to cash flow; low risk
Law and finance: investor and property rights protection affects financial development, ownership concentration, corporate valuation, cash and dividend policies. LLSV.
Comovement

4. This paper Is there comovement in firm investments?
After controlling for firm similarities and economic characteristics, correlation in investment decisions is due a common subset of information.
Can we explain it by agency, information asymmetry?
Are there gains from information acquisition, is CI distortionary?
Comovement

5. The “how”: information acquisition
Firms can “discover” (acquire) value-relevant information about investment projects
Such information is private and costly, so firms can instead use less accurate, public information
Tradeoff  endogenous information acquisition
Investments based on similar information result in the observed higher comovement (CI)
Several reasons for suboptimally low information acquisition and high CI
Comovement

6. “Why”: Agency
Investors delegate investment and information acquisition decisions to managers
Information acquisition effort  agency conflict
(The manager bears the cost but does not absorb the full benefit of higher firm value)
H1: Stronger governance  Less Comovement
Alternative argument: entrenched managers face fewer career concerns (Scharfstein and Stein 1990, Stein 2003) / relative performance evaluation (Maug and Naik 1996)  herd less
Comovement

7. “Why”: information asymmetry
Information asymmetry: private investment information is not verifiable. In anticipation of added scrutiny, higher cost of capital, managers invest based on public information  comovement.
Disclosure standards and analyst forecasts can mitigate the information asymmetry
H2: Lower information asymmetry  Less Comovement
Comovement

8. “Why”: Property rights
Expropriation of private property rights: rent-seeking/threat of expropriation by the public sector  lower cash flows, lower gains to information acquisition  more comovement
H3: Better Property Rights  Less Comovement
Comovement

9. Other determinants of comovement
Ownership concentration (?)
Similar growth and investment opportunities (+)
Correlated cash flows * financial constraint (+)
Dependence on external equity markets (-/?)
Common shocks (high-tech firms) (+)
Low asset specificity (many tangible assets) (+)
Industry concentration (product markets) (+)
Macro level: volatility (+), weak financial development (+); income (-)
Comovement

10. Performance effects of comovement
C.p., underuse of private information leads to
less optimal allocation of capital to investment projects (accept NPV-, forgo NPV+ projects) and
to forgoing firm-specific improvements in investment technology
The result is decreased performance and lower productivity growth (at the country level)
H4: High comovement  Lower performance
Comovement

11. Data and variables
Compustat Global Industrial / Global Issues for data on firm characteristics for
In firm-level analyses, use S&P’s Transparency and Disclosure data ( )
Exclude financials and utilities, obs. with missing data, and country-years with fewer than 10 obs.
Firm-level propensity to comove with the industry investment trend; comovement index constructed similarly to Morck, Yeung, and Yu 2000
TFP growth - similarly to John et al. 2007
Performance regressions: 3-year MA of lags, IV
Comovement

12. Determinants of CI: Industry, Intl (Table 2)
Comovement

13. Determinants of CI: Firm-level, Intl (Table 3)
Comovement

14. Determinants of CI: Firm-level, US (Table 5)
Comovement

15. Performance effects of CI: Firm & Industry, US (Table 7)
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16. Conclusions and future work
As with investors and fund managers, we find that some firms mimic each other’s investment decisions
Less stringent monitoring of the management lowers costly information acquisition effort and leads to excessive reliance on public investment information
Firms faced with high information asymmetry similarly conform to the common trend
Legal environment features such as weak shareholder and property rights are also associated with higher comovement in investment
Comovement

17. Conclusions and future work (cont)
Tested other explanations for differences in CI, including similar investment opportunities (+), common shocks (+), low asset specificity (+), financial constraints, concentrated ownership
Bottom-line effects: distortionary effect of high comovement on performance and growth, c.p.
Potential extension: differences across economic cycles;
Implication: can explain return comovement and inefficient investment allocation
Comovement