Fundamentals, Misvaluation, and Investment: The Real Story

Bob Chirinko and Huntley Schaller

No 1922, CESifo Working Paper Series from CESifo

Abstract: Is real investment fully determined by fundamentals or is it sometimes affected by stock market 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 G30 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Fundamentals, Misvaluation, and Investment. The Real Story (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1922

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