Fundamentals, Misvaluation, and Investment. The Real Story
Is real investment fully determined by fundamentals or is it sometimes affected by stockmarket misvaluation? We introduce three new tests that: measure the reaction of investment to sales shocks for firms that may be overvalued; use Fama-MacBeth regressions to determine whether "overinvestment" affects subsequent returns; and analyze the time path of the marginal product of capital in reaction to fundamental and misvaluation shocks. Besides these qualitative tests, we introduce a measure of misvaluation into standard investment equations to estimate the quantitative effect of misvaluation on investment. Overall, the evidence suggests that both fundamental and misvaluation shocks affect investment.
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References listed on IDEAS
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- Steven N. Kaplan & Luigi Zingales, 2000.
"Investment-Cash Flow Sensitivities are not Valid Measures of Financing Constraints,"
NBER Working Papers
7659, National Bureau of Economic Research, Inc.
- Steven N. Kaplan & Luigi Zingales, 2000. "Investment-Cash Flow Sensitivities Are Not Valid Measures Of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 115(2), pages 707-712, May.
- R. Glenn Hubbard, 1998.
"Capital-Market Imperfections and Investment,"
Journal of Economic Literature,
American Economic Association, vol. 36(1), pages 193-225, March.
- Stein, Jeremy C, 1996.
"Rational Capital Budgeting in an Irrational World,"
The Journal of Business,
University of Chicago Press, vol. 69(4), pages 429-55, October.
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