Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry
AbstractConventional economic theory assumes that firms always minimize costs given the output they produce. News articles and interviews with executives, however, indicate that firms from time to time engage in cost-cutting exercises. One popular belief is that firms cut costs when they are in economic distress, and grow fat when they are relatively wealthy. We explore this hypothesis by studying the response of the stock market values of gold mining companies to changes in gold prices. The value of a cost-minimizing, profit-maximizing firm is convex in the price of a competitively supplied input or output, but we find that the stock values of many gold mining companies are concave in the price of gold. We show that this is consistent with fat accumulation when a firm grows wealthy. We then address a number of potential alternative explanations and discuss where fat in these companies might reside.
Download InfoIf 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.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7075.
Date of creation: Apr 1999
Date of revision:
Publication status: published as Borenstein, Severin and Joe Farrell. "Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry." Rand Journal of Economics 38 (Autumn 2007).
Note: AP IO
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- Severin Borenstein & Joseph Farrell, 2007. "Do investors forecast fat firms? Evidence from the gold-mining industry," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 626-647, 09.
- Borenstein, Severin & Farrell, Joseph, 2006. "Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry," Competition Policy Center, Working Paper Series, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley qt4h02v1jp, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- G3 - Financial Economics - - Corporate Finance and Governance
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
- L72 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Other Nonrenewable Resources
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.:
- Robert S. Pindyck, 1992.
"The Present Value Model of Rational Commodity Pricing,"
NBER Working Papers
4083, National Bureau of Economic Research, Inc.
- Pindyck, Robert S, 1993. "The Present Value Model of Rational Commodity Pricing," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 103(418), pages 511-30, May.
- Pindyck, Robert S., 1991. "The present value model of rational commodity pricing," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 3354-91., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Olivier J. Blanchard & Florencio Lopez-de-Silane, 1993.
"What do Firms do with Cash Windfalls?,"
NBER Working Papers
4258, National Bureau of Economic Research, Inc.
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
- John R. Graham & Daniel A. Rogers, 2002. "Do Firms Hedge in Response to Tax Incentives?," Journal of Finance, American Finance Association, American Finance Association, vol. 57(2), pages 815-839, 04.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
- Peter Tufano, 1998. "The Determinants of Stock Price Exposure: Financial Engineering and the Gold Mining Industry," Journal of Finance, American Finance Association, American Finance Association, vol. 53(3), pages 1015-1052, 06.
- David Levinson & Reinaldo Garcia & Kathy Carlson, 2001. "A Framework for Assessing Public Private Partnerships," Working Papers, University of Minnesota: Nexus Research Group 200712, University of Minnesota: Nexus Research Group.
- Jose E. Galdon Sanchez & James A. Schmitz, Jr., 1999. "Threats to industry survival and labor productivity: world iron-ore markets in the 1980's," Staff Report, Federal Reserve Bank of Minneapolis 263, Federal Reserve Bank of Minneapolis.
- Joseph Farrell & Severin Borenstein, 2000. "Is Cost-Cutting Evidence of X-Inefficiency?," American Economic Review, American Economic Association, American Economic Association, vol. 90(2), pages 224-227, May.
- Benjamin Bridgman, 2011. "Competition, Work Rules and Productivity," 2011 Meeting Papers 289, Society for Economic Dynamics.
- José E. Galdón-Sánchez & James A. Schmitz Jr., 2002.
"Competitive Pressure and Labor Productivity: World Iron-Ore Markets in the 1980's,"
American Economic Review, American Economic Association,
American Economic Association, vol. 92(4), pages 1222-1235, September.
- Jose E. Galdon-Sanchez & James A. Schmitz, Jr., 2003. "Competitive pressure and labor productivity: world iron ore markets in the 1980s," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 9-23.
- Juha Kilponen & Torsten Santavirta, 2005.
"Competition and Innovation - Microeconometric Evidence Using Finnish Data,"
Industrial Organization, EconWPA
- Juha Kilponen & Torsten Santavirta, 2004. "Competition and Innovation - Microeconometric Evidence using Finnish Data," Research Reports 113, Government Institute for Economic Research Finland (VATT).
- Doh-Shin Jeon, 2003. "A Theory of Information Flows," Working Papers 77, Barcelona Graduate School of Economics.
- Leemore S. Dafny, 2010. "Are Health Insurance Markets Competitive?," American Economic Review, American Economic Association, American Economic Association, vol. 100(4), pages 1399-1431, September.
- Alberto Behar & James Hodge, 2007.
"The employment effects of mergers in a declining industry: the case of South African gold mining,"
Economics Series Working Papers
335, University of Oxford, Department of Economics.
- Behar Alberto & Hodge James, 2008. "The Employment Effects of Mergers in a Declining Industry: The Case of South African Gold Mining," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 8(1), pages 1-20, August.
- Doh Shin Jeon, . "Relying on the agent in charge of production for project evaluation," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 623, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2006.
- Maliranta, Mika, 2002. "From R&D to Productivity Through Micro-Level Restructuring," Discussion Papers, The Research Institute of the Finnish Economy 795, The Research Institute of the Finnish Economy.
- Leemore Dafny, 2008. "Are Health Insurance Markets Competitive?," NBER Working Papers 14572, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.