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Can Optimism about Technology Stocks Be Good for Welfare? Positive Spillovers vs. Equity Market Losses

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  • Katrin Tinn
  • Evangelia Vourvachaki

Abstract

This paper analyzes the impact of equity market information imperfections on R&D driven growth. The mechanism proposed is built on two premises. First, the R&D-sector relies largely on equity finance, because of its production features. Second, equity can be persistently mispriced. This is due to investors rationally taking into account both private and public information. This paper shows that optimism in equity market can generate long-run consumption gains, despite the excess capital losses realized in the short-run. This result arises from the externalities in R&D production that result in uderinvestment in R&D in a market economy with perfect information.

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Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp383.

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Date of creation: Apr 2009
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Handle: RePEc:cer:papers:wp383

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Keywords: Equity mispricing; R&D growth; Optimism; Welfare.;

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  1. Colin Mayer & Wendy Carlin, 1999. "Finance, Investment and Growth," Economics Series Working Papers, University of Oxford, Department of Economics 1999-FE-09, University of Oxford, Department of Economics.
  2. Comin, D. & Gertler, M., 2003. "Medium Term Business Cycles," Working Papers, C.V. Starr Center for Applied Economics, New York University 03-05, C.V. Starr Center for Applied Economics, New York University.
  3. Evangelia Vourvachaki, 2005. "Information and Communication Technologies in a Multi-Sector Endogenous Growth Model," Money Macro and Finance (MMF) Research Group Conference 2005, Money Macro and Finance Research Group 10, Money Macro and Finance Research Group.
  4. Ricardo J. Caballero & Emmanuel Farhi & Mohamad L. Hammour, 2006. "Speculative Growth: Hints from the U.S. Economy," American Economic Review, American Economic Association, American Economic Association, vol. 96(4), pages 1159-1192, September.
  5. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1990. "Speculative Dynamics," NBER Working Papers 3242, National Bureau of Economic Research, Inc.
  6. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
  7. Katrin Tinn, 2010. "Technology Adoption with Exit in Imperfectly Informed Equity Markets," American Economic Review, American Economic Association, American Economic Association, vol. 100(3), pages 925-57, June.
  8. Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. " Momentum Strategies," Journal of Finance, American Finance Association, American Finance Association, vol. 51(5), pages 1681-1713, December.
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