Fundamentals, Misvaluation, and Investment: The Real Story

58 Pages Posted: 27 Feb 2007

See all articles by Robert S. Chirinko

Robert S. Chirinko

University of Illinois at Chicago, Department of Finance; CESifo (Center for Economic Studies and Ifo Institute)

Huntley Schaller

Carleton University - Department of Economics

Date Written: February 2007

Abstract

Is real investment fully determined by fundamentals or is it sometimes affected by stock market misvaluation? We introduce three new tests that: measure the reaction of investment to sales shocks for firms that may be overvalued; use Fama-MacBeth regressions to determine whether overinvestment affects subsequent returns; and analyze the time path of the marginal product of capital in reaction to fundamental and misvaluation shocks. Besides these qualitative tests, we introduce a measure of misvaluation into standard investment equations to estimate the quantitative effect of misvaluation on investment. Overall, the evidence suggests that both fundamental and misvaluation shocks affect investment.

Keywords: investment, stock market, fundamentals, misvaluation, bubbles, real effects of financial markets

JEL Classification: E44, E22, E32, G3

Suggested Citation

Chirinko, Robert S. and Schaller, Huntley, Fundamentals, Misvaluation, and Investment: The Real Story (February 2007). CESifo Working Paper Series No. 1922. Available at SSRN: https://ssrn.com/abstract=965415

Robert S. Chirinko (Contact Author)

University of Illinois at Chicago, Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

HOME PAGE: http://tigger.uic.edu/~chirinko/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Huntley Schaller

Carleton University - Department of Economics ( email )

1125 Colonel By Drive
Ottawa, Ontario K1S 5B6
Canada
613-520-3751 (Phone)
613-520-3906 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
299
Abstract Views
1,213
rank
102,934
PlumX Metrics