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Do stock prices influence corporate decisions? Evidence from the technology bubble

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  • Campello, Murillo
  • Graham, John R.

Abstract

We study the capital investment, stock issuance, and cash savings behavior of non-tech manufacturers (old economy firms) during the 1990s technology bubble. Our empirical results show that high stock prices affect corporate policies because they relax financing constraints. During the tech bubble, constrained non-tech firms' investment responded strongly to “high stock prices” (specifically, the component of price that is not captured by fundamentals). They also issued stock in response to that overvaluation effect, saving part of the proceeds in their cash accounts. We find no such patterns for unconstrained non-tech firms, nor for tech firms. Our findings are not consistent with the notion that managers systematically issue overvalued stocks and invest in ways that transfer wealth from new to old shareholders. More broadly, they suggest that what appears to be overvaluation in one sector of the economy may have positive externalities for other sectors.

Suggested Citation

  • Campello, Murillo & Graham, John R., 2013. "Do stock prices influence corporate decisions? Evidence from the technology bubble," Journal of Financial Economics, Elsevier, vol. 107(1), pages 89-110.
  • Handle: RePEc:eee:jfinec:v:107:y:2013:i:1:p:89-110
    DOI: 10.1016/j.jfineco.2012.08.002
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    9. Doukakis, Leonidas C. & Papanastasopoulos, Georgios A., 2014. "The accrual anomaly in the U.K. stock market: Implications of growth and accounting distortions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 256-277.
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    15. Grout, Paul A. & Zalewska, Anna, 2016. "Stock market risk in the financial crisis," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 326-345.

    More about this item

    Keywords

    Stock markets; Corporate policies; Price bubbles; Financial constraints;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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