Essays on Stock Return Comovement and Corporate Investment

This thesis contains three separate essays related to stock return comovement and corporate investment. The first essay examines the role of corporate insiders' incentives in affecting stock return comovement and tests the empirical implications of Jin and Myers (2006): Corporate insiders capture a firm's cash flow beyond outside investors' expectation by withholding good news and end up absorbing more firm-specific risk, thereby increasing stock return comovement. Using a total of 2,016 firms from 21 countries in East Asia and Western Europe, I show that the wedge between voting rights and cash flow rights is an important factor influencing the price formation process in which firm-specific good or bad news is differentially incorporated into stock price. Stock returns for high-wedge firms comove less with the market than for low-wedge firms, and control-ownership wedge is significantly and negatively related to the likelihood of positive return jumps.;The second essay examines the role of institutional investors in influencing stock return comovement and tests the empirical implications of Veldkamp (2006) information-driven comovement theory. In presence of complementarities in information demand and high fixed costs for information production, investors rely on high-demand low-cost aggregate information and their information choices induce excess stock return comovement. Using institutional ownership (for 7,859 non-U.S. firms from 43 countries) as a proxy for the ability to produce firm-specific information, I find that different types of institutional investors affect stock return comovement differently. In particular, foreign (especially U.S.) institutional investors with high stakeholdings or with frequent trading are more effective in reducing stock return comovement.;The third essay examines the role of corporate insiders' incentives for private control benefits in affecting investment sensitivity to stock price. While prior studies find that stock price informativeness improves firms' learning from the stock market, I offer an alternative agency-cost based explanation for investment sensitivity to stock price. Using a total of 2,861 firms from 22 countries in East Asia and Western Europe, I document a strong negative association between control-ownership wedge and investment sensitivity to stock price, suggesting that controlling shareholders' incentives for private control benefits reduce their propensity to listen to the market.