Rationality of Negative Stock-Price Responses to Strong Economic Activity

Sangkyun Park

Financial Analysts Journal, 1997, vol. 53, issue 5, 52-56

Abstract: Monthly, quarterly, and annual data between 1956 and 1995 were used to examine the effects of real economic variables on stock returns, future corporate cash flows, and future inflation. In general, relative effects of various economic variables on stock returns are justified by their effects on future corporate cash flows and on inflation. In particular, employment growth shows the strongest negative effect on stock returns. Compared with other variables, employment growth is related more negatively with future corporate cash flows and more positively with future inflation. These effects are most pronounced in annual data, which reflect long-term relationships. Based on these results, negative stock-price responses to strong economic activity seem to be rational.

Date: 1997
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DOI: 10.2469/faj.v53.n5.2117

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