Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry

Severin Borenstein and Joseph Farrell ()

Competition Policy Center, Working Paper Series from Competition Policy Center, Institute for Business and Economic Research, UC Berkeley

Abstract: JEL CODES: D21, G3, L2, L72 KEYWORDS: profit function, free cash flow, gold mining, x-efficiency, rent seeking, fat ABSTRACT: Conventional economic theory assumes that firms always minimize costs given the output they produce. News articles and interviews with executives, however, indicate that firms from time to time engage in cost-cutting exercises. One popular belief is that firms cut costs when they are in economic distress, and grow fat when they are relatively wealthy. We explore this hypothesis by studying how the stock market valuations of gold mining companies vary with gold prices. The value of a cost-minimizing, profit-maximizing firm is convex in the price of a competitively supplied input or output, but we find that the stock values of many gold mining companies are concave in the price of gold. We show that this is consistent with fat accumulation when a firm grows wealthy. We then address a number of potential alternative explanations and discuss where fat in these companies might reside.

Keywords: profit function; free cash flow; gold mining; x-efficiency; rent seeking; fat (search for similar items in EconPapers)
Date: 2006-01-31
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.escholarship.org/uc/item/4h02v1jp.pdf;origin=repeccitec (application/pdf)

Related works:
Journal Article: Do investors forecast fat firms? Evidence from the gold-mining industry (2007)
Working Paper: Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cdl:compol:qt4h02v1jp

Access Statistics for this paper

More papers in Competition Policy Center, Working Paper Series from Competition Policy Center, Institute for Business and Economic Research, UC Berkeley Contact information at EDIRC.
Bibliographic data for series maintained by Lisa Schiff ().