Advanced Search
MyIDEAS: Login to save this paper or follow this series

Do Stock Price Bubbles Influence Corporate Investment?

Contents:

Author Info

  • Simon Gilchrist
  • Charles P. Himmelberg
  • Gur Huberman

Abstract

Building on recent developments in behavioral asset pricing, we develop a model in which dispersion of investor beliefs under short-selling constraints drives a firm's stock price above its fundamental value. Managers optimally respond to the stock market bubble by issuing new equity. The bubble reduces the user-cost of capital and increase real investment. Using the variance of analysts' earnings forecasts as a proxy for the dispersion of investor beliefs, we find strong empirical support for the model's key prediction that increases in dispersion cause increases in new equity issuance, Tobin's Q, and real investment.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w10537.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10537.

as in new window
Length:
Date of creation: Jun 2004
Date of revision:
Publication status: published as Gilchrist, Simon, Charles P. Himmelberg and Gur Huberman. "Do Stock Price Bubbles Influence Corporate Investment?," Journal of Monetary Economics, 2005, v52(4,May), 805-827.
Handle: RePEc:nbr:nberwo:10537

Note: CF ME AP
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Marianne Bertrand & Antoinette Schoar, 2003. "Managing With Style: The Effect Of Managers On Firm Policies," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(4), pages 1169-1208, November.
  2. 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.
  3. Chirinko, Robert S. & Schaller, Huntley, 1996. "Bubbles, fundamentals, and investment: A multiple equation testing strategy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(1), pages 47-76, August.
  4. Steve Bond & Jason Cummins, 2001. "Noisy share prices and the Q model of investment," IFS Working Papers, Institute for Fiscal Studies W01/22, Institute for Fiscal Studies.
  5. Stephen Morris & Franklin Allen & Hyun Song Shin, 2004. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets," Yale School of Management Working Papers, Yale School of Management ysm346, Yale School of Management.
  6. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, Elsevier, vol. 15(1-2), pages 61-89.
  7. Robert S. Chirinko & Huntley Schaller, 2001. "Business Fixed Investment and "Bubbles": The Japanese Case," American Economic Review, American Economic Association, American Economic Association, vol. 91(3), pages 663-680, June.
  8. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. " Do Managerial Objectives Drive Bad Acquisitions?," Journal of Finance, American Finance Association, American Finance Association, vol. 45(1), pages 31-48, March.
  9. Hirshleifer, David, 2001. "Investor Psychology and Asset Pricing," MPRA Paper 5300, University Library of Munich, Germany.
  10. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198292272, October.
  11. Andrei Shleifer & Robert W. Vishny, 1995. "The Limits of Arbitrage," NBER Working Papers 5167, National Bureau of Economic Research, Inc.
  12. Simon Gilchrist & Charles Himmelberg, 1999. "Investment: Fundamentals and Finance," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 223-274 National Bureau of Economic Research, Inc.
  13. Stein, Jeremy C., 1996. "Rational Capital Budgeting in an Irrational World," Scholarly Articles 3708373, Harvard University Department of Economics.
  14. Simon Gilchrist & Charles P. Himmelberg & Gur Huberman, 2004. "Do stock price bubbles influence corporate investment?," Staff Reports, Federal Reserve Bank of New York 177, Federal Reserve Bank of New York.
  15. Jeffrey A. Wurgler & Malcolm P. Baker, 2001. "Market Timing and Capital Structure," Yale School of Management Working Papers, Yale School of Management ysm181, Yale School of Management.
  16. Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2002. "When Does the Market Matter? Stock Prices and the Investsment of Equity-Dependent Firms," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1978, Harvard - Institute of Economic Research.
  17. Blanchard, Olivier & Rhee, Changyong & Summers, Lawrence, 1993. "The Stock Market, Profit, and Investment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(1), pages 115-36, February.
  18. Loderer, Claudio & Cooney, John W & van Drunen, Leonard D, 1991. " The Price Elasticity of Demand for Common Stock," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 621-51, June.
  19. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 92(2), pages 323-36, May.
  20. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 29-51, July.
  21. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
  22. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, American Finance Association, vol. 60(6), pages 2661-2700, December.
  23. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  24. Holthausen, Robert W. & Leftwich, Richard W. & Mayers, David, 1990. "Large-block transactions, the speed of response, and temporary and permanent stock-price effects," Journal of Financial Economics, Elsevier, Elsevier, vol. 26(1), pages 71-95, July.
  25. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(2-3), pages 307-339.
  26. Jones, Charles M. & Lamont, Owen A., 2002. "Short-sale constraints and stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(2-3), pages 207-239.
  27. D'Avolio, Gene, 2002. "The market for borrowing stock," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(2-3), pages 271-306.
  28. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
  29. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. " Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 49(5), pages 1541-78, December.
  30. Gur Huberman, 2001. "Contagious Speculation and a Cure for Cancer: A Nonevent that Made Stock Prices Soar," Journal of Finance, American Finance Association, American Finance Association, vol. 56(1), pages 387-396, 02.
  31. Nicholas Barberis & Richard Thaler, 2002. "A Survey of Behavioral Finance," NBER Working Papers 9222, National Bureau of Economic Research, Inc.
  32. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002. "Breadth of ownership and stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(2-3), pages 171-205.
  33. Harrison Hong & Jeremy C. Stein, 2003. "Differences of Opinion, Short-Sales Constraints, and Market Crashes," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 16(2), pages 487-525.
  34. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, American Finance Association, vol. 32(4), pages 1151-68, September.
  35. Cheolbeom Park, 2001. "Stock Returns and the Dispersion in Earnings Forecasts," Departmental Working Papers, National University of Singapore, Department of Economics wp0117, National University of Singapore, Department of Economics.
  36. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
  37. Bagwell, Laurie Simon, 1992. " Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity," Journal of Finance, American Finance Association, American Finance Association, vol. 47(1), pages 71-105, March.
  38. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, American Finance Association, vol. 41(3), pages 579-90, July.
  39. Scholes, Myron S, 1972. "The Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 45(2), pages 179-211, April.
  40. Polk, Christopher & Sapienza, Paola, 2003. "The Real Effects of Investor Sentiment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3826, C.E.P.R. Discussion Papers.
  41. Eli Ofek & Matthew Richardson, 2003. "DotCom Mania: The Rise and Fall of Internet Stock Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 58(3), pages 1113-1138, 06.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:10537. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.