When Does the Market Matter? Stock Prices and the Investsment of Equity-Dependent Firms

Malcolm Baker, Jeremy Stein and Jeffrey Wurgler

No 1978, Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research

Abstract: We use a simple model to outline the conditions under which corporate investment will be sensitive to non-fundamental movements in stock prices. The key cross-sectional prediction of the model is that stock prices will have a stronger impact on the investment of firms that are “equity dependent†– firms that need external equity to finance their marginal investments. Using an index of equity dependence based on the work of Kaplan and Zingales (1997), we find strong support for this prediction. In particular, firms that rank in the top quintile of the KZ index have investment that is almost three times as sensitive to stock prices as firms in the bottom quintile. We also verify several other predictions of the model.

Date: 2002
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Related works:
Journal Article: When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms (2003)
Working Paper: When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms (2002)
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