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"Building on recent developments in behavioral asset pricing, we develop a model in which an increase in the dispersion of investor beliefs under short-selling constraints predicts a 'bubble', or a rise in a stock's price above its fundamental value. Our model predicts that managers respond to bubbles by issuing new equity and increasing capital expenditures. We test these predictions, as well as others, using the variance of analysts' earnings forecasts--a proxy for the dispersion of investor beliefs--to identify the bubble component in Tobin's Q. When comparing firms traded on the New York Stock Exchange with those traded on NASDAQ, we find that our model successfully captures key features of the technology boom of the 1990s. We obtain further evidence supporting our model by using a panel-data VAR framework. We find that orthogonalized shocks to dispersion have positive and statistically significant effects on Tobin's Q, net equity issuance, and real investment--results that are consistent with the model's predictions"--Federal Reserve Bank of New York web site.
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Subjects
Investments, Prices, StocksShowing 2 featured editions. View all 2 editions?
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1
Do stock price bubbles influence corporate investment?
2004, Federal Reserve Bank of New York
Electronic resource
in English
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2
Do stock price bubbles influence corporate investment?
2004, National Bureau of Economic Research
Electronic resource
in English
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Book Details
Edition Notes
Includes bibliographical references.
Title from PDF file as viewed on 2/16/2005.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.
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"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"--National Bureau of Economic Research web site.
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