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

The Quarterly journal of economics, 2003-08, Vol.118 (3), p.969-1005 [Peer Reviewed Journal]

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Title:
When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms
Author: Baker, Malcolm ; Stein, Jeremy C. ; Wurgler, Jeffrey
Subjects: Capital expenditures ; Capital investments ; Cash flow ; Coefficients ; Economic models ; Equity ; Financial investments ; Financial leverage ; Investments ; Stock market indices ; Stock prices ; Studies ; Undervalued stock
Is Part Of: The Quarterly journal of economics, 2003-08, Vol.118 (3), p.969-1005
Description: We use a simple model to outline the conditions under which corporate investment is sensitive to nonfundamental movements in stock prices. The key prediction is that stock prices have a stronger impact on the investment of "equity-dependent" firms-firms that need external equity to finance marginal investments. Using an index of equity dependence based on the work of Kaplan and Zingales, we find support for this hypothesis. 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.
Publisher: Oxford: MIT Press
Language: English
Identifier: ISSN: 0033-5533
EISSN: 1531-4650
DOI: 10.1162/00335530360698478
CODEN: QJECAT
Source: Alma/SFX Local Collection

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