Fundamentals, Misvaluation, and Investment: The Real Story

Chirinko, Robert S. and Schaller, Huntley (December 2006) Fundamentals, Misvaluation, and Investment: The Real Story. Former Series > Working Paper Series > IHS Economics Series 200


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Abstract: Is real investment fully determined by fundamentals or is it sometimes affected by stockmarket misvaluation? We introduce three new tests that: measure the reaction of investment to sales shocks for firms that may be overvalued; use Fama-MacBeth regressions to determine whether "overinvestment" affects subsequent returns; and analyze the time path of the marginal product of capital in reaction to fundamental and misvaluation shocks. Besides these qualitative tests, we introduce a measure of misvaluation into standard investment equations to estimate the quantitative effect of misvaluation on investment. Overall, the evidence suggests that both fundamental and misvaluation shocks affect investment.;

Item Type: IHS Series
Keywords: 'Investment' 'Stock market' 'Fundamentals' 'Misvaluation' 'Bubbles' 'Real effects of financial markets'
Classification Codes (e.g. JEL): E44, E22, E32, G3
Date Deposited: 26 Sep 2014 10:38
Last Modified: 27 Sep 2019 06:31
ISBN: 1605-7996

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