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

Imperial College London - Accounting, Finance, and Macroeconomics

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)

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

Evangelia Vourvachaki (Contact Author)

CERGE-EI ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

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

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