ABSTRACT: Many papers document the effect of
stock prices on corporate
investment. We know high stock prices imply high investment, but we
know little about what low stock prices imply, other than the
implied flip side (low investment). This paper studies the behavior
of low stock price firms and adds to this literature in several
ways. First, a theoretical model is developed reconciling this
finding with the existing investment-stock price dependence
empirical results. If investment is likely to increase the interim
stock price, the manager will invest and monitor costs less
pertinaciously. Second, a new dimension of corporate behavior
that is stock price dependent is documented. Low stock prices
precede a lower cost structure. Third, empirical tests provide
strong support for the model. In particular, low stock prices
predate lower costs, investments, and higher cash flows. Robustness
checks reveal that the results are not driven by firms' financial
constraints or issuance of debt and equity securities.