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Learning and the Value of the Firm

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  • Nobuhiro Kiyotaki
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    Abstract

    The paper studies under what conditions the value of the firm occasionally increases for a while before it suddenly drops, like a "bubble". We consider the environment where the trend of net cash flow from a firm's production depends on uncertain quality of a manager, and the manager is occasionally replaced by a new manager. People know whether the manager is replaced, but they do not know the exact quality of the manager so that they gradually learn about it. We show that, if the current manager is good, the value of the firm tends to increase more rapidly than the net cash flow because people become more and more optimistic about the current manager, until the optimism disappears with sudden retire of the manager. The value of the firms appears to contain a bubble because the value gradually deviates from the present value of the current net cash flow until the deviation disappears. We extend the basic model to allow the firm to replace unsuccessful managers endogenously, and show that the value of the firm more frequently deviates upward from the present value of the current net cash flow than downward.

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    File URL: http://www.nber.org/papers/w3480.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3480.

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    Date of creation: Oct 1990
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    Handle: RePEc:nbr:nberwo:3480

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    1. Hamilton, James D. & Whiteman, Charles H., 1985. "The observable implications of self-fulfilling expectations," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 353-373, November.
    2. Flood, Robert P & Hodrick, Robert J, 1986. " Asset Price Volatility, Bubbles, and Process Switching," Journal of Finance, American Finance Association, vol. 41(4), pages 831-42, September.
    3. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
    4. Ariel Pakes & Richard Ericson, 1989. "Empirical Implications of Alternative Models of Firm Dynamics," NBER Working Papers 2893, National Bureau of Economic Research, Inc.
    5. Flood, Robert P & Garber, Peter M, 1980. "An Economic Theory of Monetary Reform," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 24-58, February.
    6. Guido Tabellini, 1987. "Learning and the Volatility of Exchange Rates," UCLA Economics Working Papers 434, UCLA Department of Economics.
    7. Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 745-70, August.
    8. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
    9. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
    10. Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-36, September.
    11. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
    12. Lewis, Karen K., 1989. "Can learning affect exchange-rate behavior? : The case of the dollar in the early 1980's," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 79-100, January.
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    Cited by:
    1. Angelos Kanas, 2003. "Non-linear forecasts of stock returns," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 22(4), pages 299-315.
    2. Simon Gilchrist & Masashi Saito, 2008. "Expectations, Asset Prices, and Monetary Policy: The Role of Learning," NBER Chapters, in: Asset Prices and Monetary Policy, pages 45-102 National Bureau of Economic Research, Inc.
    3. Kanas, Angelos, 2005. "Nonlinearity in the stock price-dividend relation," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 583-606, June.
    4. A. Kanas, 2003. "Non-linear cointegration between stock prices and dividends," Applied Economics Letters, Taylor & Francis Journals, vol. 10(7), pages 401-405.

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