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Stock market and investment: the signalling role of the market


  • Cherian Samuel


The evidence in this paper suggests that the q-theory of investment is not adequate to explain capital expenditure decisions at the firm level. Managerial as well as market perception is important, with the former more critical than the latter. The results also suggest that stock market activity has only limited implications for the resource allocation process in the economy. The evidence for the q-theory, based on firm-level data, confirms the previous finding in the literature that the poor empirical performance of the model in the past has been due in part to the use of aggregate data at the economy level. These findings have important implications for the debate in the literature regarding the relationship between shareholder myopia and managerial myopia. There is a notion in the literature that the stock market puts too much pressure on managers, who in turn indulge in myopic behaviour by underinvesting for the long-term, especially by way of R and D expenditures. The results presented here suggest that, given the limited role that market perception elements play in the determination of capital expenditures at the firm-level, shareholder myopia is unlikely to lead to managerial myopia.

Suggested Citation

  • Cherian Samuel, 2001. "Stock market and investment: the signalling role of the market," Applied Economics, Taylor & Francis Journals, vol. 33(10), pages 1243-1252.
  • Handle: RePEc:taf:applec:v:33:y:2001:i:10:p:1243-1252
    DOI: 10.1080/00036840121765

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    References listed on IDEAS

    1. Robert Eisner, 1978. "Factors in Business Investment," NBER Books, National Bureau of Economic Research, Inc, number eisn78-1, December.
    2. Rhee, C. & Rhee, W., 1991. "Fundamental Value and Investment: Micro Data Evidence," RCER Working Papers 282, University of Rochester - Center for Economic Research (RCER).
    3. Samuel, Cherian, 1996. "Stock market and investment : the signaling role of the market," Policy Research Working Paper Series 1612, The World Bank.
    4. Robert Eisner, 1978. "Introduction to "Factors in Business Investment"," NBER Chapters,in: Factors in Business Investment, pages 1-16 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Acquaah, Moses, 2015. "Determinants of corporate listings on stock markets in Sub-Saharan Africa: Evidence from Ghana," Emerging Markets Review, Elsevier, vol. 22(C), pages 154-175.
    2. Hirokatsu Asano, 2010. "Estimating irreversible investment with financial constraints: an application of switching regression models," Applied Economics, Taylor & Francis Journals, vol. 42(2), pages 211-222.
    3. Carl Joachim Kock, 2005. "When the Market Misleads: Stock Prices, Firm Behavior, and Industry Evolution," Organization Science, INFORMS, vol. 16(6), pages 637-660, December.

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