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When Does The Market Matter? Stock Prices And The Investment Of Equity-Dependent Firms

  • Malcolm Baker
  • Jeremy C. Stein
  • Jeffrey Wurgler

We use a simple model to outline the conditions under which corporate investment is sensitive to nonfundamental movements in stock prices. The key prediction is that stock prices have a stronger impact on the investment of "equity-dependent" firms-firms that need external equity to finance marginal investments. Using an index of equity dependence based on the work of Kaplan and Zingales, we find support for this hypothesis. In particular, firms that rank in the top quintile of the KZ index have investment that is almost three times as sensitive to stock prices as firms in the bottom quintile. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 118 (2003)
Issue (Month): 3 (August)
Pages: 969-1005

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Handle: RePEc:tpr:qjecon:v:118:y:2003:i:3:p:969-1005
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