Profits and stock prices: the importance of being earnest
While the prospect for equity values naturally concerns traders and investors, it also is a concern for public policy. Because investors’ wealth depends on the value of corporate equity, the demand for consumption goods can vary with the price of stocks. The valuation of corporations’ productive assets on stock exchanges also influences businesses’ willingness and ability to undertake new investments. If the falling price of stocks should retard the pace of capital formation in the future, it also would retard the potential growth of output and living standards. ; This article examines the relationship between the earnings of non financial corporations and the value of their equity. It concludes that the price of stocks corresponds more closely to the earnings that companies disclose in their financial reports than it does to the earnings for nonfinancial corporations reported in the national income accounts. This analysis also suggests that the value of equity does not necessarily reflect corporations’ incentives for undertaking investments. If the opportunities for profitable growth, both here and abroad, remain sufficiently attractive, lower prices of stocks would not foretell a commensurate drop in corporations’ capital budgets.
Volume (Year): (1992)
Issue (Month): Mar ()
|Contact details of provider:|| Postal: 600 Atlantic Avenue, Boston, Massachusetts 02210|
Web page: http://www.bos.frb.org/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
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.:
- Fumio Hayashi, 1981.
"Tobin's Marginal q and Average a : A Neoclassical Interpretation,"
457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
- LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-74, May.
- Shiller, Robert J, 1981.
"Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?,"
American Economic Review,
American Economic Association, vol. 71(3), pages 421-36, June.
- Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
- Kenneth A. Froot & Maurice Obstfeld, 1989.
"Intrinsic Bubbles: The Case of Stock Prices,"
NBER Working Papers
3091, National Bureau of Economic Research, Inc.
- DeJong, David N & Whiteman, Charles H, 1991. "The Temporal Stability of Dividends and Stock Prices: Evidence from the Likelihood Function," American Economic Review, American Economic Association, vol. 81(3), pages 600-617, June.
- Robert J. Shiller & John Y. Campbell, 1986.
"The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors,"
Cowles Foundation Discussion Papers
812, Cowles Foundation for Research in Economics, Yale University.
- John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
- John Y. Campbell & Robert J. Shiller, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc.
- Stephen K. McNees, 1991. "How fast can we grow?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-14.
- Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
- Hsieh, David A, 1991. " Chaos and Nonlinear Dynamics: Application to Financial Markets," Journal of Finance, American Finance Association, vol. 46(5), pages 1839-77, December.
- Yoshikawa, Hiroshi, 1980. "On the "q" Theory of Investment," American Economic Review, American Economic Association, vol. 70(4), pages 739-43, September.
- Pindyck, Robert S, 1991.
"Irreversibility, Uncertainty, and Investment,"
Journal of Economic Literature,
American Economic Association, vol. 29(3), pages 1110-48, September.
- Pindyck, Robert, 1989. "Irreversibility, uncertainty, and investment," Policy Research Working Paper Series 294, The World Bank.
- Robert S. Pindyck, 1990. "Irreversibility, Uncertainty, and Investment," NBER Working Papers 3307, National Bureau of Economic Research, Inc.
- Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
- George M. Von Furstenberg, 1977. "Corporate Investment: Does Market Valuation Matter in the Aggregate?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 347-408.
- Miller, Merton H. & Scholes, Myron S., 1978. "Dividends and taxes," Journal of Financial Economics, Elsevier, vol. 6(4), pages 333-364, December.
- Joe Peek & Eric S. Rosengren, 1988. "The stock market and economic activity," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 39-50.
- Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
- Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
- Fromm, Gary & Ciccolo, John, 1979. ""q" and the Theory of Investment," Journal of Finance, American Finance Association, vol. 34(2), pages 535-47, May.
- Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
When requesting a correction, please mention this item's handle: RePEc:fip:fedbne:y:1992:i:mar:p:26-44. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio)
If references are entirely missing, you can add them using this form.