The Stock Market, Profit and Investment / Olivier Blanchard, Changyong Rhee, Lawrence Summers.

Format:

Book

Author/Creator:

Blanchard, Olivier.

Contributor:

National Bureau of Economic Research.

Rhee, Changyong.

Summers, Lawrence.

Series:

Working Paper Series (National Bureau of Economic Research) no. w3370.

NBER working paper series no. w3370

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1990.

Summary:

Should managers, when making investment decisions, follow the signals given by the stock market even if those do not coincide with their own assessments of fundamental value? This paper reviews the theoretical arguments and examines the empirical evidence, constructing and using a new US time series of data on the q ratio from 1900 to 1988. We decompose q - - the ratio of the market value of corporate capital to its replacement cost - - into the product of two terms, reflecting "fundamentals" and "valuation", the ratio of market value to fundamentals. We then examine the relation of investment to each of the two, using a number of alternative proxies for fundamentals. We interpret our results as pointing, strongly but not overwhelmingly, to a larger role of "fundamentals" than of "valuation" in investment decisions.

Notes:

Print version record

May 1990.