When a firm's management needs to raise external capital in order to finance an investment project, it is likely to have better information about the project's future return than do potential investors. In such a case, as has been shown in the literature, management may be able to signal its information through the use of certain financial variables. However, the possibility that management may be able to use the level of investment in the project itself to signal their information has not been considered. The purpose of this paper is to examine this possibility. It is shown here that the level of capital investment may be able to perfectly reveal management's information, with a higher input level signalling more favorable information. It is further demonstrated that even in this equilibrium, financial variables still play an important role. Among other results, it is shown, in contrast to a conclusion of a study by Leland and Pyle, that in this setting the number of shares held by management may be negatively correlated with the favorableness of their information.

Ronald W. Masulis, Brett Trueman, Corporate Investment and Dividend Decisions under Differential Personal Taxation, The Journal of Financial and Quantitative Analysis, Vol. 23, No. 4 (Dec., 1988), pp. 369-385

We examine the suitability of using overnight returns to measure firm-specific investor sentiment by analyzing whether they possess characteristics expected of a sentiment measure. We document short-term overnight-return persistence, consistent with existing evidence of short-term persistence in the share demand of sentiment-influenced investors. We find that short-term persistence is stronger for harder-to-value firms, consistent with existing evidence that sentiment plays a larger role for such firms. We show that stocks with high (low) overnight returns underperform (outperform) over the longer term, consistent with prior evidence of temporary sentiment-driven mispricing. Overall, our evidence supports using overnight returns to measure firm-specific sentiment.