Stock prices and fundamentals in a production economy
This paper compares the predictions for the market value of firms from the Gordon growth model with those from a dynamic general equilibrium model of production. The predictions for movements in the market value of firms in response to a decline in the required return or an increase in the growth rate of the economy are quantitatively and qualitatively different across the models. While previous research has illustrated how a drop in the required return or an increase in the growth rate of the economy can explain the runup in equity values in the 1990s in the Gordon growth model, the consideration of production overturns these results and illustrates that auxiliary implications of such shifts in fundamentals, such as a sharp increase in the investment intensity of the economy, are not supported by the data in the late 1990s. This tension between theory and data suggests that the skyrocketing market value of firms in the second half of the 1990s may reflect a degree of irrational exuberance.
|Date of creation:||2000|
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- Hayashi, Fumio, 1982.
"Tobin's Marginal q and Average q: A Neoclassical Interpretation,"
Econometric Society, vol. 50(1), pages 213-24, January.
- Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- John Heaton & Deborah Lucas, 2000.
"Stock Prices and Fundamentals,"
in: NBER Macroeconomics Annual 1999, Volume 14, pages 213-264
National Bureau of Economic Research, Inc.
- Michael T. Kiley, 1999. "Computers and growth with costs of adjustment: will the future look like the past?," Finance and Economics Discussion Series 1999-36, Board of Governors of the Federal Reserve System (U.S.).
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