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Fundamentals, Misvaluation, and Investment. The Real Story

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Author Info
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)

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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 Format: application/pdf
File Function: First version, 2006
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Publisher 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;

Other versions of this item:

Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
G3 - Financial Economics - - Corporate Finance and Governance

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Stein, Jeremy C, 1996. "Rational Capital Budgeting in an Irrational World," Journal of Business, University of Chicago Press, vol. 69(4), pages 429-55, October. [Downloadable!] (restricted)
    Other versions:
  3. 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. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
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This page was last updated on 2009-11-27.

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