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Equity Prices, Productivity Growth, And ‘The New Economy’

  • Jakob B Madsen
  • E Philip Davis

The increase in equity prices over the 1990s has to a large degree been attributed to permanently higher productivity growth that is derived from the ‘new economy’ and related research and development (R&D) expenditures. This paper establishes a rational expectations model of technology innovations and equity prices, which shows that under plausible assumptions,productivity advances can only have temporary effects on fundamentals of equity prices. Using data on R&D capital and fixed capital productivity for 11 OECD countries, the evidence give strong support for the model by suggesting that technology innovations indeed have only temporary effects on equity returns.

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File URL: http://www.brunel.ac.uk/329/efwps/03-04.pdf
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Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Public Policy Discussion Papers with number 03-04.

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Length: 31 pages
Date of creation: Feb 2003
Date of revision:
Handle: RePEc:bru:bruppp:03-04
Contact details of provider: Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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  1. Donald Robertson & Stephen Wright, 2006. "Dividends, Total Cash Flow to Shareholders, and Predictive Return Regressions," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 91-99, February.
  2. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-run Stock Market Outlook: An Update," Cowles Foundation Discussion Papers 1295, Cowles Foundation for Research in Economics, Yale University.
  3. Ellen R. McGrattan & Edward C. Prescott, 2003. "Average Debt and Equity Returns: Puzzling?," American Economic Review, American Economic Association, vol. 93(2), pages 392-397, May.
  4. Jason G. Cummins, 2003. "A New Approach to the Valuation of Intangible Capital," NBER Working Papers 9924, National Bureau of Economic Research, Inc.
  5. Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina., 2000. "The declining U.S. equity premium," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-19.
  6. Amit Goyal & Ivo Welch, 1999. "Predicting the Equity Premium with Dividend Ratios," Yale School of Management Working Papers amz2437, Yale School of Management, revised 01 Nov 2002.
  7. Hulten, Charles R, 1975. "Technical Change and the Reproducibility of Capital," American Economic Review, American Economic Association, vol. 65(5), pages 956-65, December.
  8. Dale W. Jorgenson, 2001. "Information Technology and the U.S. Economy," American Economic Review, American Economic Association, vol. 91(1), pages 1-32, March.
  9. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
  10. Bipasa Datta & Huw D. Dixon, 2002. "Technological Change, Entry and Stock Market Dynamics: An Analysis of Transition in a Monopolistic Economy," CESifo Working Paper Series 641, CESifo Group Munich.
  11. Carlota Perez, 2002. "Technological Revolutions and Financial Capital," Books, Edward Elgar, number 2640, December.
  12. Manishi Prasad & Peter Wahlqvist & Rich Shikiar & Ya-Chen Tina Shih, 2004. "A," PharmacoEconomics, Springer Healthcare | Adis, vol. 22(4), pages 225-244.
  13. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
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