Do Stock Prices Influence Corporate Decisions? Evidence from the Technology Bubble

42 Pages Posted: 13 Mar 2006

See all articles by Murillo Campello

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 16, 2007

Abstract

Do firms issue stock when prices seem irrationally high? Do they invest or save the proceeds from the sale of overvalued stocks? Is value created or destroyed in the process? This paper uses a novel identification strategy to tackle these questions. We examine the capital investment, stock issuance, and cash savings behavior of financially constrained and unconstrained non-tech manufacturers ("old economy firms") around the 1990's technology bubble. Our results suggest that, because they relax financing constraints, high stock prices affect corporate policies. In particular, during the bubble, constrained non-tech firms issued equity in response to mispricing and used the proceeds to invest. They also saved part of those funds in their cash accounts. We do not find similar patterns for unconstrained non-tech firms, nor for tech firms. Our findings do not support the notion that managers systematically issue overvalued stocks and invest in ways that transfer wealth from new to old shareholders, destroying economic value. Rather, our evidence implies that what appears to be overvaluation in one sector of the economy may have welfare-increasing effects across other sectors.

Keywords: Stock markets, real investment, bubbles, financial constraints, endogeneity

JEL Classification: G31

Suggested Citation

Campello, Murillo and Graham, John Robert, Do Stock Prices Influence Corporate Decisions? Evidence from the Technology Bubble (July 16, 2007). Available at SSRN: https://ssrn.com/abstract=890129 or http://dx.doi.org/10.2139/ssrn.890129

Murillo Campello (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

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HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

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John Robert Graham

Duke University ( email )

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919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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