Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry
Conventional economic theory assumes that firms always minimize costs given the output they produce. News articles and interviews with executives, however, indicate that firms from time to time engage in cost-cutting exercises. One popular belief is that firms cut costs when they are in economic distress, and grow fat when they are relatively wealthy. We explore this hypothesis by studying the response of the stock market values of gold mining companies to changes in gold prices. The value of a cost-minimizing, profit-maximizing firm is convex in the price of a competitively supplied input or output, but we find that the stock values of many gold mining companies are concave in the price of gold. We show that this is consistent with fat accumulation when a firm grows wealthy. We then address a number of potential alternative explanations and discuss where fat in these companies might reside.
|Date of creation:||Apr 1999|
|Date of revision:|
|Publication status:||published as Borenstein, Severin and Joe Farrell. "Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry." Rand Journal of Economics 38 (Autumn 2007).|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Blanchard, Olivier Jean & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 1994.
"What do firms do with cash windfalls?,"
Journal of Financial Economics,
Elsevier, vol. 36(3), pages 337-360, December.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
- John R. Graham & Daniel A. Rogers, 2002. "Do Firms Hedge in Response to Tax Incentives?," Journal of Finance, American Finance Association, vol. 57(2), pages 815-839, 04.
- Pindyck, Robert S., 1991.
"The present value model of rational commodity pricing,"
3354-91., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Pindyck, Robert S, 1993. "The Present Value Model of Rational Commodity Pricing," Economic Journal, Royal Economic Society, vol. 103(418), pages 511-30, May.
- Robert S. Pindyck, 1992. "The Present Value Model of Rational Commodity Pricing," NBER Working Papers 4083, National Bureau of Economic Research, Inc.
- Peter Tufano, 1998. "The Determinants of Stock Price Exposure: Financial Engineering and the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 53(3), pages 1015-1052, 06.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:7075. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.