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Irreversible Capital and the Stock Market Response to Shocks in Profitability

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  • Sakellaris, Plutarchos

Abstract

This paper develops a vintage model of capital accumulation to identify the structural linkage between shocks to input or output prices and a firm's stock-market value. The model accounts for a substantial part of the sample variation in excess returns, thus providing evidence for a systematic link between the stock-market valuation of firms and the economic factors that affect their profitability. The 1973-74 oil shock is shown to have had a strong impact on excess returns; firms whose capital consisted of vintages built when energy was relatively cheap were hit the hardest in value. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 38 (1997)
Issue (Month): 2 (May)
Pages: 351-79

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Handle: RePEc:ier:iecrev:v:38:y:1997:i:2:p:351-79

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Cited by:
  1. H. Youn Kim, 2003. "Intertemporal production and asset pricing: a duality approach," Oxford Economic Papers, Oxford University Press, vol. 55(2), pages 344-379, April.
  2. Barnett, Steven A. & Sakellaris, Plutarchos, 1998. "Nonlinear response of firm investment to Q:: Testing a model of convex and non-convex adjustment costs1," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 261-288, July.
  3. Virjinia Jeliazkova, 2010. "Effects of the Dynamics of the Oil Price – Theoretical and Empirical Bases," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 127-165.
  4. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
  5. Hritonenko, Natali & Yatsenko, Yuri, 2012. "Energy substitutability and modernization of energy-consuming technologies," Energy Economics, Elsevier, vol. 34(5), pages 1548-1556.
  6. Antonia Díaz & Luis A. Puch & María D. Guilló, 2001. "Costly capital reallocation and energy use," Documentos de Trabajo del ICAE 0111, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  7. Chao Wei, 2003. "Energy, the Stock Market, and the Putty-Clay Investment Model," American Economic Review, American Economic Association, vol. 93(1), pages 311-323, March.
  8. Charles Ka Yui Leung & Nan-Kuang Chen & Chih-Chiang Hsu, 2004. "Structural Break or Asymmetry? An Empirical Study of the Stock Wealth Effect on Consumption," Econometric Society 2004 Far Eastern Meetings 690, Econometric Society.
  9. Andrew Atkeson & Patrick J. Kehoe, 1997. "Models of energy use: putty-putty vs. putty-clay," Staff Report 230, Federal Reserve Bank of Minneapolis.

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