Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry / Severin Borenstein, Joseph Farrell.

Format:

Book

Author/Creator:

Borenstein, Severin.

Contributor:

National Bureau of Economic Research.

Farrell, Joseph.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7075.

NBER working paper series no. w7075

Language:

English

Subjects (All):

Corporate profits.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1999.

Cambridge, Mass. : National Bureau of Economic Research, 1999.

Summary:

Conventional economic theory assumes that firms always minimize costs given the output they produce. News articles and interviews with executives, however, indicate that firms from time to time engage in cost-cutting exercises. One popular belief is that firms cut costs when they are in economic distress, and grow fat when they are relatively wealthy. We explore this hypothesis by studying the response of the stock market values of gold mining companies to changes in gold prices. The value of a cost-minimizing, profit-maximizing firm is convex in the price of a competitively supplied input or output, but we find that the stock values of many gold mining companies are concave in the price of gold. We show that this is consistent with fat accumulation when a firm grows wealthy. We then address a number of potential alternative explanations and discuss where fat in these companies might reside.

Notes:

Print version record

April 1999.