Do Stock Prices Influence Corporate Decisions? Evidence from the Technology Bubble

Murillo Campello and John Graham

No 13640, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Do firms issue stock when prices seem irrationally high? Do they invest or save the proceeds from the sale of overvalued stocks? Is value created or destroyed in the process? This paper uses a novel identification strategy to tackle these questions. We examine the capital investment, stock issuance, and cash savings behavior of financially constrained and unconstrained non-tech manufacturers ("old economy firms") around the 1990's technology bubble. Our results suggest that, because they relax financing constraints, high stock prices affect corporate policies. In particular, during the bubble, constrained non-tech firms issued equity in response to mispricing and used the proceeds to invest. They also saved part of those funds in their cash accounts. We do not find similar patterns for unconstrained non-tech firms, neither for tech firms. Our findings do not support the notion that managers systematically issue overvalued stocks and invest in ways that transfer wealth from new to old shareholders, destroying economic value. Rather, our evidence implies that what appears to be overvaluation in one sector of the economy may have welfare-increasing effects across other sectors.

JEL-codes: G31 (search for similar items in EconPapers)
Date: 2007-11
Note: AP CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Journal of Financial Economics Volume 107, Issue 1, January 2013, Pages 89–110

Downloads: (external link)
http://www.nber.org/papers/w13640.pdf (application/pdf)

Related works:
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:nbr:nberwo:13640

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w13640

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().