Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry

43 Pages Posted: 21 Jul 1999 Last revised: 16 Mar 2010

See all articles by Severin Borenstein

Severin Borenstein

University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER)

Joseph Farrell

University of California, Berkeley - Department of Economics

Date Written: April 1999

Abstract

Conventional economic theory assumes that firms always minimize costs given the output they produce. News articles and interviews with executives, however, indicate that firms from time to time engage in cost-cutting exercises. One popular belief is that firms cut costs when they are in economic distress, and grow fat when they are relatively wealthy. We explore this hypothesis by studying the response of the stock market values of gold mining companies to changes in gold prices. The value of a cost-minimizing, profit-maximizing firm is convex in the price of a competitively supplied input or output, but we find that the stock values of many gold mining companies are concave in the price of gold. We show that this is consistent with fat accumulation when a firm grows wealthy. We then address a number of potential alternative explanations and discuss where fat in these companies might reside.

Suggested Citation

Borenstein, Severin and Farrell, Joseph, Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry (April 1999). NBER Working Paper No. w7075, Available at SSRN: https://ssrn.com/abstract=159707

Severin Borenstein (Contact Author)

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-3689 (Phone)
707-885-2508 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joseph Farrell

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-9854 (Phone)
510-642-6615 (Fax)

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