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Stock prices, anticipations and investment in general equilibrium

Jacques Dreze, Oussama Lachiri () and Enrico Minelli

No 2009083, CORE Discussion Papers from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: We propose an objective for the firm in a model of production economies extending over time under uncertainty and with incomplete markets. We derive the objective of the firm from the assumption of initial-shareholders efficiency. Each shareholder is assumed to communicate to the firm her marginal valuation of profits at all future events (expressed in terms of initial resources). In defining her own marginal valuation of the firm's profits, a shareholder takes into consideration the direct impact of a change in the value of dividends but also the impact of future dividends on the firm's stock price when she trades shares. To predict the impact on the stock price, she uses a state price process, her price theory. The firm computes its own shadow prices for profits at all date-events by simply adding up the marginal valuations of all its initial shareholders. If no restrictions are placed on individual price theories, the existence of equilibria may require financial constraints on a firm's investment when its shareholders are more optimistic than the market about the profitability of such investment. We then impose that price theories be compatible with the observed equilibrium: they should satisfy a no-arbitrage condition. We show by means of an example that, with incomplete markets and no-short selling constraints, this restriction on price theories is not enough to bring consistency in the individuals' marginal evaluations: a financial constraint on the firm's investment may still be needed to obtain an equilibrium

Keywords: general equilibrium; incomplete markets; stock prices; anticipations; investment constraints; arbitrage (search for similar items in EconPapers)
JEL-codes: D2 D51 D52 D53 G11 G12 G32 M20 P12 (search for similar items in EconPapers)
Date: 2009-12-01
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Working Paper: Stock Prices, Anticipations and Investment in General Equilibrium (2009) Downloads
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