A Closer Look at the Investment–Q Sensitivity : The Role of Smart Money

We find that the positive (negative) response of corporate investment to high (low) stock valuation is stronger when top-performing institutional investors in the firm’s industry increase (decrease) their ownership in the firm. The effects are more pronounced for firms with stronger managerial learning incentives and for top investors with greater information advantages. Top investors’ ownership changes also convey incremental information to managers when acquisition announcement returns or overall industry valuation are used as signals for investment opportunities. Managerial learning from top investors is value-enhancing. Our evidence suggests that corporate investment decisions are guided by institutional investors with superior performance