Growth Versus Margins: Destabilizing Consequences of Giving the Stock Market What it Wants

Jeremy Stein and Philippe Aghion

Scholarly Articles from Harvard University Department of Economics

Abstract: We develop a model in which a firm can devote effort either to increasing sales growth, or to improving per-unit profit margins. If the firm's manager cares about the current stock price, she will favor the growth strategy when the market pays more attention to growth numbers. Conversely, it can be rational for the market to weight growth measures more heavily when it is known that the firm is following a growth strategy. This two-way feedback between firms' strategies and the market's pricing rule can lead to excess volatility in real variables, even absent any external shocks.

Date: 2008
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Published in Journal of Finance

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Journal Article: Growth versus Margins: Destabilizing Consequences of Giving the Stock Market What It Wants (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:3660730

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