Source: www.oecd.org
Topic: Stock Investment
Sort Desciption: in the investment decision. Thus, the null hypothesis that stock market .... may underestimate the role of the stock market in investment decisions. ...
Content Inside: OECD Economic Studies No. 20, Spring 1993 THE STOCK MARKET AND INVESTMENT Warren Tease CONTENTS Introduction . 1. 11. The behaviour of equity prices . Investment and share prices. . A. Theoretical considerations . B. Empirical evidence . i) Incremental explanatory power . iii) Event analysis . ii) A decomposition of the explanatory power of stock returns. . 111. Conclusions . 42 43 47 47 52 52 55 56 58 Bibliography . 60 The author is Senior Economist (Business Finance) in the Economic Analysis Department of the Reserve Bank of Australia. This paper was prepared while he was an administrator in the Money and Finance Division of the OECD. He would like to thank Paul Atkinson, John P. Martin, Giuseppe Nicoletti, Paul Francis OBrien, Jeffrey Shafer, Hiromichi Shirakawa and Peter Sturrn for thoughtful comments on an earlier drafl of the paper. Efficient statistical assistance was provided by Laure Meuro and secretarial assistance by Andrea Prowse. Any remaining errors rest with the author. 41 INTRODUCTION The stock market has an important role in the allocation of resources, both directly as a source of funds and as a determinant of firms value and borrowing capacity. However, a growing body of empirical evidence has raised some doubts about whether equity markets are efficient in the sense of appropriately reflecting relevant and avaiia- ble information. The large swings in equity prices in several countries during the 1980s provided additional evidence that market valuations were more variable than the earn- ings prospects of firms. These episodes encouraged proposals for reforms aimed at limiting volatility,* because excess volatility or mispricing could have undesirable real consequences and lead to a misallocation of resources. The aim of this paper is to examine the relationship between equity prices and business investment, addressing the question of whether investment is influenced by inefficient pricing in equity markets. It consi ...
