Can Optimism about Technology Stocks be Good for Welfare? Positive Spillovers vs. Equity Market Losses

CERGE-EI Working Paper No. 383

55 Pages Posted: 14 Aug 2009

See all articles by Katrin Tinn

Katrin Tinn

McGill University - Desautels Faculty of Management; Centre for Economic Policy Research (CEPR)

Evangelia Vourvachaki

CERGE-EI

Date Written: April 1, 2009

Abstract

This paper analyzes the impact of equity market information imperfections on R&D driven growth. The mechanism proposed is built on two premises. First, the R&D-sector relies largely on equity finance, because of its production features. Second, equity can be persistently mispriced. This is due to investors rationally taking into account both private and public information. This paper shows that optimism in equity market can generate long-run consumption gains, despite the excess capital losses realized in the short-run. This result arises from the externalities in R&D production that result in underinvestment in R&D in a market economy with perfect information.

Keywords: equity mispricing, R&D growth, optimism, welfare

JEL Classification: G12, O3, O4

Suggested Citation

Tinn, Katrin and Vourvachaki, Evangelia, Can Optimism about Technology Stocks be Good for Welfare? Positive Spillovers vs. Equity Market Losses (April 1, 2009). CERGE-EI Working Paper No. 383, Available at SSRN: https://ssrn.com/abstract=1448610 or http://dx.doi.org/10.2139/ssrn.1448610

Katrin Tinn (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Evangelia Vourvachaki (Contact Author)

CERGE-EI ( email )

Politickych veznu 7
Prague, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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