Growth Versus Margins: Destabilizing Consequences of Giving the Stock Market What it Wants
AbstractWe develop a model in which a firm can devote effort either to increasing sales growth, or to improving per-unit profit margins. If the firm's manager cares about the current stock price, she will favor the growth strategy when the market pays more attention to growth numbers. Conversely, it can be rational for the market to weight growth measures more heavily when it is known that the firm is following a growth strategy. This two-way feedback between firms' strategies and the market's pricing rule can lead to excess volatility in real variables, even absent any external shocks.
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Bibliographic InfoPaper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3660730.
Date of creation: 2008
Date of revision:
Publication status: Published in Journal of Finance
Other versions of this item:
- Philippe Aghion & Jeremy C. Stein, 2008. "Growth versus Margins: Destabilizing Consequences of Giving the Stock Market What It Wants," Journal of Finance, American Finance Association, vol. 63(3), pages 1025-1058, 06.
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