Do Stock Price Bubbles Influence Corporate Investment?

37 Pages Posted: 28 Sep 2004

See all articles by Charles P. Himmelberg

Charles P. Himmelberg

Goldman, Sachs & Co.

Simon Gilchrist

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

Gur Huberman

Columbia Business School - Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 2004

Abstract

Building on recent developments in behavioral asset pricing, we develop a model in which an increase in the dispersion of investor beliefs under short-selling constraints predicts a bubble, or a rise in a stock's price above its fundamental value. Our model predicts that managers respond to bubbles by issuing new equity and increasing capital expenditures. We test these predictions, as well as others, using the variance of analysts' earnings forecasts - a proxy for the dispersion of investor beliefs - to identify the bubble component in Tobin's Q.

When comparing firms traded on the New York Stock Exchange with those traded on NASDAQ, we find that our model successfully captures key features of the technology boom of the 1990s. We obtain further evidence supporting our model by using a panel-data VAR framework. We find that orthogonalized shocks to dispersion have positive and statistically significant effects on Tobin's Q, net equity issuance, and real investment - results that are consistent with the model's predictions.

Keywords: investment, stock market, bubble, dispersion

JEL Classification: E22, G31, G32, D92

Suggested Citation

Himmelberg, Charles P. and Gilchrist, Simon and Huberman, Gur, Do Stock Price Bubbles Influence Corporate Investment? (February 2004). FRB of New York Staff Report No. 177. Available at SSRN: https://ssrn.com/abstract=596613 or http://dx.doi.org/10.2139/ssrn.596613

Charles P. Himmelberg (Contact Author)

Goldman, Sachs & Co. ( email )

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

Simon Gilchrist

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

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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