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

48 Pages Posted: 4 Jan 2002 Last revised: 13 Jan 2009

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Jeffrey Wurgler

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)

Multiple version iconThere are 4 versions of this paper

Abstract

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 [1997], 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.

Keywords: Investment, Behavioral Finance

JEL Classification: G31, G14, E22

Suggested Citation

Baker, Malcolm P. and Wurgler, Jeffrey A. and Stein, Jeremy C., When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms. Available at SSRN: https://ssrn.com/abstract=295248 or http://dx.doi.org/10.2139/ssrn.295248

Malcolm P. Baker

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6566 (Phone)

HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeffrey A. Wurgler

NYU Stern School of Business ( email )

Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeremy C. Stein (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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