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The Stock Market, Profit, and Investment

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  • Olivier Blanchard
  • Changyong Rhee
  • Lawrence Summers

Abstract

Should managers, when taking investment decisions, follow the signals given by the stock market even when those do not coincide with their own assessment of fundamentals? Do they? In this paper we review theoretical arguments and examine the empirical evidence. First, we look at the relation between investment, market valuation, and proxies for fundamentals over the last 90 years. Second, we look at the behavior of investment during the episodes associated with the crashes of 1929 and 1987. We find a limited role of market valuation, given fundamentals.

Suggested Citation

  • Olivier Blanchard & Changyong Rhee & Lawrence Summers, 1993. "The Stock Market, Profit, and Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 115-136.
  • Handle: RePEc:oup:qjecon:v:108:y:1993:i:1:p:115-136.
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