Source: pages.stern.nyu.edu
Topic: Stock Investment
Sort Desciption: Equity dependence and the link between investment and stock prices: Interactive specifications. Regressions of investment on Q, Q interacted ...
Content Inside: When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms ∗ Malcolm Baker Harvard Business School and NBER mbaker@hbs.edu Jeremy C. Stein Harvard Economics Department and NBER jeremy_stein@harvard.edu Jeffrey Wurgler NYU Stern School of Business jwurgler@stern.nyu.edu July 17, 2002 Abstract We use a simple model to outline the conditions under which corporate investment will be sensitive to non-fundamental movements in stock prices. The key cross-sectional prediction of the model is that stock prices will have a stronger impact on the investment of firms that are “equity dependent†– firms that need external equity to finance their marginal investments. Using an index of equity dependence based on the work of Kaplan and Zingales (1997), we find strong support for this prediction. In particular, firms that rank in the top quintile of the KZ index have investment that is almost three times as sensitive to stock prices as firms in the bottom quintile. We also verify several other predictions of the model. ∗ We thank Eric Nierenberg for research assistance. We also thank Heitor Almeida, Steve Kaplan, Eli Ofek, Lasse Pedersen, David Scharfstein, Andrei Shleifer, Tuomo Vuolteenaho, seminar participants at Harvard, Dartmouth, NYU and Utah, two anonymous referees, and the editors for helpful comments. Financial support from the Division of Research of the Harvard Graduate School of Business Administration (Baker and Wurgler) and from the National Science Foundation (Stein) is gratefully acknowledged. 1 I. Introduction Corporate investment and the stock market are positively correlated, in both the time series and the cross-section. The traditional explanation for this relationship is that stock prices reflect the marginal product of capital. This is the interpretation given to the relationship between investment and Tobin’s Q, for example, as in Tobin (1969) and von Furstenberg (1977). Keynes (1936) suggests a ver ...
heitor almeida, tuomo vuolteenaho, vuolteenaho