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

Quarterly Journal of Economics, Vol. 118, No. 3, pp. 969-1006, August 2003

Posted: 29 May 2003 Last revised: 13 Aug 2008

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)

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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.

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. Quarterly Journal of Economics, Vol. 118, No. 3, pp. 969-1006, August 2003. Available at SSRN: https://ssrn.com/abstract=412120

Malcolm P. Baker (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
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HOME PAGE: http://www.people.hbs.edu/mbaker

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Jeffrey A. Wurgler

NYU Stern School of Business ( email )

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

National Bureau of Economic Research (NBER)

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Jeremy C. Stein

Harvard University - Department of Economics ( email )

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

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

National Bureau of Economic Research (NBER)

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