Do Stock Price Bubbles Influence Corporate Investment?

42 Pages Posted: 17 Jun 2004 Last revised: 2 Sep 2004

See all articles by Simon Gilchrist

Simon Gilchrist

Boston University - Department of Economics; National Bureau of Economic Research (NBER)

Charles P. Himmelberg

Goldman, Sachs & Co.

Gur Huberman

Columbia Business School - Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2004

Abstract

Building on recent developments in behavioral asset pricing, we develop a model in which dispersion of investor beliefs under short-selling constraints drives a firm's stock price above its fundamental value. Managers optimally respond to the stock market bubble by issuing new equity. The bubble reduces the user-cost of capital and increase real investment. Using the variance of analysts' earnings forecasts as a proxy for the dispersion of investor beliefs, we find strong empirical support for the model's key prediction that increases in dispersion cause increases in new equity issuance, Tobin's Q, and real investment.

Suggested Citation

Gilchrist, Simon and Himmelberg, Charles P. and Huberman, Gur, Do Stock Price Bubbles Influence Corporate Investment? (June 2004). NBER Working Paper No. w10537. Available at SSRN: https://ssrn.com/abstract=556524

Simon Gilchrist (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Charles P. Himmelberg

Goldman, Sachs & Co. ( email )

200 West St
New York, NY 10233
917-343-3218 (Phone)

Gur Huberman

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

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