Fundamentals, Misvaluation, and Investment. The Real Story

Bob Chirinko () and Huntley Schaller

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: E44 E22 E32 G3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2006-12
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http://www.ihs.ac.at/publications/eco/es-200.pdf 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: http://EconPapers.repec.org/RePEc:ihs:ihsesp:200

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