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Relative Factor Price Changes and Equity Prices

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  • Peter J. Elmer
  • Patric H. Hendershott

Abstract

This paper suggests that the decline in equity prices, and thus in Tobin's average q, during the 1970s may be attributable to changes in expected relative factor prices. More specifically, q is shown to be a negative function of the extent to which current relative factor price expectations differ from those when capital was put in place. Because relative factor prices became more volatile after 1967, the observed decline in average q, and thus in stock prices, can be explained by the "relative price" hypothesis.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1449.

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Date of creation: Sep 1984
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Handle: RePEc:nbr:nberwo:1449

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  1. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
  2. Martin Feldstein, 1979. "Inflation, Tax Rules, and the Stock Market," NBER Working Papers 0403, National Bureau of Economic Research, Inc.
  3. Ernst R. Berndt & Melvyn A. Fuss, 1982. "Productivity Measurement Using Capital Asset Valuation to Adjust for Variations in Utilization," NBER Working Papers 0895, National Bureau of Economic Research, Inc.
  4. Michael Salinger & Lawrence H. Summers, 1983. "Tax Reform and Corporate Investment: A Microeconometric Simulation Study," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 247-288 National Bureau of Economic Research, Inc.
  5. Hendershott, Patric H, 1981. "The Decline in Aggregate Share Values: Taxation, Valuation Errors, Risk and Profitability," American Economic Review, American Economic Association, vol. 71(5), pages 909-22, December.
  6. Ando, Albert K, et al, 1974. "On the Role of Expectations of Price and Technological Change in an Investment Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(2), pages 384-414, June.
  7. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(1), pages 79-95, February.
  8. Fischer, Stanley & Merton, Robert C., 1984. "Macroeconomics and finance: The role of the stock market," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 21(1), pages 57-108, January.
  9. Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
  10. Yoshikawa, Hiroshi, 1980. "On the "q" Theory of Investment," American Economic Review, American Economic Association, vol. 70(4), pages 739-43, September.
  11. Bruno, Michael, 1984. "Raw Materials, Profits, and the Productivity Slowdown," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(1), pages 1-29, February.
  12. Berndt, Ernst R, 1976. "Reconciling Alternative Estimates of the Elasticity of Substitution," The Review of Economics and Statistics, MIT Press, vol. 58(1), pages 59-68, February.
  13. Holland, Daniel M & Myers, Stewart C, 1980. "Profitability and Capital Costs for Manufacturing Corporations and All Nonfinancial Corporations," American Economic Review, American Economic Association, vol. 70(2), pages 320-25, May.
  14. Lindenberg, Eric B & Ross, Stephen A, 1981. "Tobin's q Ratio and Industrial Organization," The Journal of Business, University of Chicago Press, vol. 54(1), pages 1-32, January.
  15. Berndt, Ernst R & Wood, David O, 1975. "Technology, Prices, and the Derived Demand for Energy," The Review of Economics and Statistics, MIT Press, vol. 57(3), pages 259-68, August.
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Cited by:
  1. Patric H. Hendershott, 1986. "Debt and Equity Returns Revisited," NBER Chapters, in: Financing Corporate Capital Formation, pages 35-50 National Bureau of Economic Research, Inc.

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