Fundamentals, Misvaluation, and Investment. The Real Story

Bob Chirinko and Huntley Schaller
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Huntley Schaller: Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria and Department of Economics, Carleton University

No 200, Economics Series from Institute for Advanced Studies

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.

Keywords: Investment; Stock market; Fundamentals; Misvaluation; Bubbles; Real effects of financial markets (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 G3 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2006-12
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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https://irihs.ihs.ac.at/id/eprint/1744 First version, 2006 (application/pdf)

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Working Paper: Fundamentals, Misvaluation, and Investment: The Real Story (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ihs:ihsesp:200

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