Finance Seminar Joel Peress

The paper asks what managers actually learn from stock prices: information about future cash flows, about the discount rate the market applies to them, or both. The authors use valuation reports from M&A deals, where managers disclose their own expectations of cash-flow growth and discount rates for target firms. When isolating price movements driven by noise, such as temporary demand shocks from mutual fund flows, they find that only managers' beliefs about the discount rate respond while cash-flow expectations barely move. The estimates imply managers get roughly two-thirds of their information about discount rates from prices, and little to none about future growth.
Stock prices mainly tell managers how much compensation investors demand for risk.
Takeaway: The main informational content of stock prices, for managers, is about required returns, not cash-flow prospects.