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Do Stock Prices Influence Corporate Decisions? Evidence from the Technology Bubble

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  • Murillo Campello
  • John Graham

Abstract

Do firms issue stock when prices seem irrationally high? Do they invest or save the proceeds from the sale of overvalued stocks? Is value created or destroyed in the process? This paper uses a novel identification strategy to tackle these questions. We examine the capital investment, stock issuance, and cash savings behavior of financially constrained and unconstrained non-tech manufacturers ("old economy firms") around the 1990's technology bubble. Our results suggest that, because they relax financing constraints, high stock prices affect corporate policies. In particular, during the bubble, constrained non-tech firms issued equity in response to mispricing and used the proceeds to invest. They also saved part of those funds in their cash accounts. We do not find similar patterns for unconstrained non-tech firms, neither for tech firms. Our findings do not support the notion that managers systematically issue overvalued stocks and invest in ways that transfer wealth from new to old shareholders, destroying economic value. Rather, our evidence implies that what appears to be overvaluation in one sector of the economy may have welfare-increasing effects across other sectors.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13640.

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Date of creation: Nov 2007
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Publication status: published as Journal of Financial Economics Volume 107, Issue 1, January 2013, Pages 89–110
Handle: RePEc:nbr:nberwo:13640

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Cited by:
  1. Kevin J. Lansing, 2008. "Speculative growth and overreaction to technology shocks," Working Paper Series 2008-08, Federal Reserve Bank of San Francisco.
  2. Malcolm Baker & Jeffrey Wurgler, 2011. "Behavioral Corporate Finance: An Updated Survey," NBER Working Papers 17333, National Bureau of Economic Research, Inc.
  3. Thierry Foucault & Laurent Frésard, 2012. "Cross-Listing, Investment Sensitivity to Stock Price, and the Learning Hypothesis," Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3305-3350.
  4. Campello, Murillo & Hackbarth, Dirk, 2012. "The firm-level credit multiplier," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 446-472.
  5. Ferrando, Annalisa & Marchica, Maria-Teresa & Mura, Roberto, 2014. "Financial flexibility across the euro area and the UK," Working Paper Series 1630, European Central Bank.
  6. 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.
  7. Lin, Huidan, 2011. "Foreign bank entry and firms' access to bank credit: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 1000-1010, April.

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