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Do Stock Price Bubbles Influence Corporate Investment?

Listed author(s):
  • Simon Gilchrist
  • Charles P. Himmelberg
  • Gur Huberman

Building on recent developments in behavioral asset pricing, we develop a model in which dispersion of investor beliefs under short-selling constraints drives a firm's stock price above its fundamental value. Managers optimally respond to the stock market bubble by issuing new equity. The bubble reduces the user-cost of capital and increase real investment. Using the variance of analysts' earnings forecasts as a proxy for the dispersion of investor beliefs, we find strong empirical support for the model's key prediction that increases in dispersion cause increases in new equity issuance, Tobin's Q, and real investment.

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File URL: http://www.nber.org/papers/w10537.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10537.

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Date of creation: Jun 2004
Publication status: published as Gilchrist, Simon, Charles P. Himmelberg and Gur Huberman. "Do Stock Price Bubbles Influence Corporate Investment?," Journal of Monetary Economics, 2005, v52(4,May), 805-827.
Handle: RePEc:nbr:nberwo:10537
Note: CF ME AP
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