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Can Optimism about Technology Stocks Be Good for Welfare? Positive Spillovers vs. Equity Market Losses

Author

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  • Katrin Tinn
  • Evangelia Vourvachaki

Abstract

This paper analyzes the impact of equity market information imperfections on R&D driven growth. The mechanism proposed is built on two premises. First, the R&D-sector relies largely on equity finance, because of its production features. Second, equity can be persistently mispriced. This is due to investors rationally taking into account both private and public information. This paper shows that optimism in equity market can generate long-run consumption gains, despite the excess capital losses realized in the short-run. This result arises from the externalities in R&D production that result in uderinvestment in R&D in a market economy with perfect information.

Suggested Citation

  • Katrin Tinn & Evangelia Vourvachaki, 2009. "Can Optimism about Technology Stocks Be Good for Welfare? Positive Spillovers vs. Equity Market Losses," CERGE-EI Working Papers wp383, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp383
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    References listed on IDEAS

    as
    1. Evangelia Vourvachaki, 2005. "Information and Communication Technologies in a Multi-Sector Endogenous Growth Model," Money Macro and Finance (MMF) Research Group Conference 2005 10, Money Macro and Finance Research Group.
    2. Ricardo J. Caballero & Emmanuel Farhi & Mohamad L. Hammour, 2006. "Speculative Growth: Hints from the U.S. Economy," American Economic Review, American Economic Association, vol. 96(4), pages 1159-1192, September.
    3. Carlin, Wendy & Mayer, Colin, 2003. "Finance, investment, and growth," Journal of Financial Economics, Elsevier, vol. 69(1), pages 191-226, July.
    4. Diego Comin & Mark Gertler, 2006. "Medium-Term Business Cycles," American Economic Review, American Economic Association, vol. 96(3), pages 523-551, June.
    5. Katrin Tinn, 2010. "Technology Adoption with Exit in Imperfectly Informed Equity Markets," American Economic Review, American Economic Association, vol. 100(3), pages 925-957, June.
    6. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1991. "Speculative Dynamics," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 529-546.
    7. Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. " Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
    8. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Equity mispricing; R&D growth; Optimism; Welfare.;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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