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Share Prices and Investment

  • Michael Andersen

    (Reserve Bank of Australia)

  • Robert Subbaraman

    (Reserve Bank of Australia)

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    In this paper we examine two related propositions: the efficiency of pricing of Australian shares and the influences of share prices on business investment. In line with similar studies overseas, we find that the Australian share market may deviate from efficient pricing over short time horizons but that there is little evidence of inefficiency over longer time horizons. To investigate the influence of share prices on investment decisions we use a simple model of real share prices to identify estimates of the ‘fundamental’ and ‘speculative’ components of share prices. As expected, the estimated fundamental component of real share prices is found to have a stronger relationship with investment than the aggregate real share price series. Despite some evidence of share price inefficiences, the speculative component of real share prices is insignificant in the same investment equations, providing evidence that speculative movements in share prices do not have a significant effect on business investment. There is evidence, however, that these speculative share price movements influence the composition of corporate financing. In particular, the timing of equity raisings appears to be influenced by both components of share prices.

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    File URL: http://www.rba.gov.au/publications/rdp/1996/pdf/rdp9610.pdf
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    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9610.

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    Date of creation: Dec 1996
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    Handle: RePEc:rba:rbardp:rdp9610
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    1. French, K.R. & Poterba, J.M., 1990. "Are Japanese Stock Prices Too High?," Working papers 547, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Huntley Schaller & Robert Chirinko, 1993. "Bubbles, Fundamentals, and Investment: A Multiple Equation Testing Strategy," Carleton Economic Papers 93-08, Carleton University, Department of Economics, revised Aug 1996.
    3. Black, Angela & Fraser, Patricia, 1995. "U.K. Stock Returns: Predictability and Business Conditions," The Manchester School of Economic & Social Studies, University of Manchester, vol. 63(0), pages 85-102, Suppl..
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    9. Cutler, David M & Poterba, James M & Summers, Lawrence H, 1990. "Speculative Dynamics and the Role of Feedback Traders," American Economic Review, American Economic Association, vol. 80(2), pages 63-68, May.
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    13. James M. Poterba & Lawrence H. Summers, 1987. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
    14. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    15. Barry Bosworth, 1975. "The Stock Market and the Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 527-300.
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