Does algorithmic trading impact investment? Algorithmic trading and investment-to-price sensitivity

The increased prevalence of algorithmic trading (AT) has an economically meaningful positive effect on the sensitivity of corporate investment to stock prices. The effect is pervasive in that the positive impact of AT on the investment-to-price sensitivity holds in even stocks with relatively fewer AT activities. The results suggest that AT contributes to managers’ learning experience by fostering the production of information that is new to managers. The increased investment-price sensitivity due to AT consequently helps managers to make better investment decisions and increases firms’ future operating performance. These effects are generally amplified for illiquid, small-cap, more volatile, and less-covered stocks by analysts and is robust to the inclusion of controls for managerial information, analyst coverage, and capital constraints.