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Fundamentals, Misvaluation, and Investment. The Real Story

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  • Chirinko, Robert S.

    (Department of Economics, Emory University)

  • Schaller, Huntley

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria and Department of Economics, Carleton University)

Abstract

Is real investment fully determined by fundamentals or is it sometimes affected by stockmarket misvaluation? We introduce three new tests that: measure the reaction of investment to sales shocks for firms that may be overvalued; use Fama-MacBeth regressions to determine whether "overinvestment" affects subsequent returns; and analyze the time path of the marginal product of capital in reaction to fundamental and misvaluation shocks. Besides these qualitative tests, we introduce a measure of misvaluation into standard investment equations to estimate the quantitative effect of misvaluation on investment. Overall, the evidence suggests that both fundamental and misvaluation shocks affect investment.

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File URL: http://www.ihs.ac.at/publications/eco/es-200.pdf
File Function: First version, 2006
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 200.

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Length: 45 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:ihs:ihsesp:200

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Related research

Keywords: Investment; Stock market; Fundamentals; Misvaluation; Bubbles; Real effects of financial markets;

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  1. Stein, Jeremy C, 1996. "Rational Capital Budgeting in an Irrational World," The Journal of Business, University of Chicago Press, vol. 69(4), pages 429-55, October.
  2. Steven N. Kaplan & Luigi Zingales, 2000. "Investment-Cash Flow Sensitivities are not Valid Measures of Financing Constraints," NBER Working Papers 7659, National Bureau of Economic Research, Inc.
  3. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
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Cited by:
  1. Murillo Campello & John Graham, 2007. "Do Stock Prices Influence Corporate Decisions? Evidence from the Technology Bubble," NBER Working Papers 13640, National Bureau of Economic Research, Inc.
  2. Stefano DellaVigna & Joshua M. Pollet, 2009. "Capital Budgeting vs. Market Timing: An Evaluation Using Demographics," NBER Working Papers 15184, National Bureau of Economic Research, Inc.
  3. Krainer, Robert, 2009. "Portfolio and financing adjustments for U.S. banks: Some empirical evidence," Journal of Financial Stability, Elsevier, vol. 5(1), pages 1-24, January.

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