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Growth Versus Margins: Destabilizing Consequences of Giving the Stock Market What it Wants

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  • Stein, Jeremy
  • Aghion, Philippe

Abstract

We 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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File URL: http://dash.harvard.edu/bitstream/handle/1/3660730/aghion_growthvsmargins.pdf
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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3660730.

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Date of creation: 2008
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Publication status: Published in Journal of Finance
Handle: RePEc:hrv:faseco:3660730

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  1. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 61(4), pages 1645-1680, 08.
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Cited by:
  1. Jiang, Zhan & Kim, Kenneth A. & Lie, Erik & Yang, Sean, 2013. "Share repurchases, catering, and dividend substitution," Journal of Corporate Finance, Elsevier, Elsevier, vol. 21(C), pages 36-50.
  2. David Berger, 2012. "Countercyclical Restructuring and Jobless Recoveries," 2012 Meeting Papers, Society for Economic Dynamics 1179, Society for Economic Dynamics.
  3. Demir, Firat & Caglayan, Mustafa, 2012. "Firm Productivity, Exchange Rate Movements, Sources of Finance and Export Orientation," MPRA Paper 37397, University Library of Munich, Germany.
  4. Steven Malliaris & Hongjun Yan, 2008. "Nickels versus Black Swans: Reputation, Trading Strategies and Asset Prices," Yale School of Management Working Papers, Yale School of Management amz2380, Yale School of Management, revised 01 Mar 2009.
  5. Emre Ozdenoren & Kathy Yuan, 2012. "Stock Market Tournaments," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 1222, Koc University-TUSIAD Economic Research Forum.
  6. Pierre Chaigneau, 2012. "The Optimal Timing of CEO Compensation," Cahiers de recherche, CIRPEE 1207, CIRPEE.
  7. Massa, Massimo & Zhang, Lei, 2009. "Cosmetic mergers: The effect of style investing on the market for corporate control," Journal of Financial Economics, Elsevier, Elsevier, vol. 93(3), pages 400-427, September.
  8. Berger, Allen N. & Bouwman, Christa H.S., 2013. "How does capital affect bank performance during financial crises?," Journal of Financial Economics, Elsevier, Elsevier, vol. 109(1), pages 146-176.

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