Corporate responses to stock price fragility

This study shows that firms regard stock price fragility - exposure to non-fundamental demand shocks stemming from the composition of equity ownership - as a salient corporate risk. We model ex ante corporate responses to higher potential for future stock market misvaluation and then empirically document that within firm variation in equity fragility has effects in line with the model: higher fragility raises cash holdings and lowers investment. Multiple natural experiments support a causal interpretation of the results. The results are shown to be more prominent in the face of high uncertainty and financial constraints. The evidence presents a new dimension of how managerial expectations affect corporate policies.