Source: people.bu.edu
Topic: Stock Investment
Sort Desciption: Most notably, it is. possible to generate large stock price bubbles with relatively small distortions to. financing activity and real investment. ...
Content Inside: Journal of Monetary Economics 52 (2005) 805–827 Do stock price bubbles influence corporate investment? $ Simon Gilchrist a,b, Ã , Charles P. Himmelberg c , Gur Huberman d a Department of Economics, Boston University, Boston, MA 02215, USA b NBER, Cambridge, MA 02138, USA c Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, USA d Business School, Columbia University, 3022 Broadway, New York, NY 10027, USA Received 11 October 2002; received in revised form 1 March 2005; accepted 3 March 2005 Abstract Dispersion in investor beliefs and short-selling constraints can lead to stock market bubbles. This paper argues that firms, unlike investors, can exploit such bubbles by issuing new shares at inflated prices. This lowers the cost of capital and increases real investment. Perhaps surprisingly, large bubbles are not eliminated in equilibrium nor do large bubbles necessarily imply large distortions. Using the variance of analysts’ earnings forecasts to proxy for the ARTICLE IN PRESS www.elsevier.com/locate/jme 0304-3932/$ - see front matter r 2005 Published by Elsevier B.V. doi:10.1016/j.jmoneco.2005.03.003 $ We are grateful to Anna Scherbina for providing us with data, and we thank Andy Abel, Tobias Adrian, Ignazio Angeloni, Brian Chernoff, Wei Jiang, Bob King, Jim Mahoney, David Marshall, Asani Sarkar, Jeremy Stein, and seminar participants at the Federal Reserve Bank of New York, Federal Reserve System Meetings, Federal Reserve Bank of San Francisco, Colorado University, Columbia University, Harvard University, University of Brescia, the ASSA meetings, and the JME/Gerzensee Conference on Behavioral Macroeconomics for helpful comments and suggestions. We are also grateful to Brian Chernoff for excellent research assistance. The views expressed are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Ã Corresponding author. Department of Econom ...
