Irreversible Capital and the Stock Market Response to Shocks in Profitability
This paper develops a vintage model of capital accumulation to identify the structural linkage between shocks to input or output prices and a firm's stock-market value. The model accounts for a substantial part of the sample variation in excess returns, thus providing evidence for a systematic link between the stock-market valuation of firms and the economic factors that affect their profitability. The 1973-74 oil shock is shown to have had a strong impact on excess returns; firms whose capital consisted of vintages built when energy was relatively cheap were hit the hardest in value. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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Volume (Year): 38 (1997)
Issue (Month): 2 (May)
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