Source: www.erf.org.eg
Topic: Stock Investment
Sort Desciption: stock market affects investment through its influence on the cost of funds and external ..... making the stock market a better predictor of investment. ...
Content Inside: Investment and the Stock Market: Evidence from Arab Firm-Level Panel Data ∗ Ali A. Bolbol ∗∗ and Mohammad M. Omran ∗∗∗ Economic Policy Institute Arab Monetary Fund P. O. Box 2818 Abu Dhabi, UAE ∗ Paper prepared for presentation at the Economic Research Forum 10 th annual conference in Marakesh, Morocco, 16-18 December, 2003. ∗∗ Corresponding Author: Email Address, aabolbol@hotmail.com ∗∗∗ Bolbol is Senior Economist and Omran is Economist at the Economic Policy Institute of the Arab Monetary Fund (AMF). The authors would like to thank Miss Ayten Fatheldin for her excellent research assistance. The views expressed in the paper are not necessarily those of the AMF. 2 Investment and the Stock Market: Evidence from Arab Firm-Level Panel Data Abstract What role do stock returns play in determining investment? In this paper, we investigate the independent effect of stock returns on investment within the context of four hypotheses: passive informant, active informant, financing, and stock market pressure. Using a sample of 83 firms from five Arab countries during 1996-2001, we find that the passive informant hypothesis holds true, with only sales and debt growth as significant determinants of capital expenditures. Surprisingly, cash flow has no effect on investment, which could be mostly due to the dividend policy of Arab firms. The fact that Arab stock markets do not allocate capital expenditures unwarranted by fundamentals gives support to current efforts at strengthening Arab stock markets. JEL Classifications: D92, G10, O 53 Key Words: Stock Markets, Firm Investment, Arab Countries, Dividend Policy. 3 I- Introduction It is well recognized that stock markets perform at least three functions: a signaling mechanism to managers regarding investment, a source of finance, and a catalyst for corporate governance. It is the first function, however, that has attracted a lot of investigation, focusing on whether stock markets or market s ...
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