The Stock Market, Profit And Investment
Should managers, when taking investment decisions, follow the signals given by the stock market even when those do not coincide with their own assessment of fundamentals? Do they? In this paper, the authors review theoretical arguments and examine the empirical evidence. First, they look at the relation between investment, market valuation, and proxies for fundamentals over the last ninety years. Second, the authors look at the behavior of investment during the episodes associated with the crashes of 1929 and 1987. The autho rs find a limited role of market valuation, given fundamentals. Copyright 1993, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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