When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms
Malcolm P. Baker
Harvard Business School; National Bureau of Economic Research (NBER)
NYU Stern School of Business; National Bureau of Economic Research (NBER)
Jeremy C. Stein
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
We use a simple model to outline the conditions under which corporate investment is sensitive to non-fundamental 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.
Number of Pages in PDF File: 48
Keywords: Investment, Behavioral Finance
JEL Classification: G31, G14, E22working papers series
Date posted: January 4, 2002 ; Last revised: January 13, 2009
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