Working Paper: NBER ID: w10537
Authors: Simon Gilchrist; Charles P. Himmelberg; Gur Huberman
Abstract: Building on recent developments in behavioral asset pricing, we develop a model in which dispersion of investor beliefs under short-selling constraints drives a firm's stock price above its fundamental value. Managers optimally respond to the stock market bubble by issuing new equity. The bubble reduces the user-cost of capital and increase real investment. Using the variance of analysts' earnings forecasts as a proxy for the dispersion of investor beliefs, we find strong empirical support for the model's key prediction that increases in dispersion cause increases in new equity issuance, Tobin's Q, and real investment.
Keywords: stock price bubbles; corporate investment; equity issuance; Tobin's Q; investor beliefs
JEL Codes: E22; G31; G32; D92
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dispersion of investor beliefs (G40) | stock prices above fundamental values (G12) |
| dispersion of investor beliefs (G40) | new equity issuance (G24) |
| new equity issuance (G24) | Tobin's Q (G19) |
| Tobin's Q (G19) | real investment (E22) |
| variance of analysts' earnings forecasts (G17) | dispersion of investor beliefs (G40) |
| positive shocks to dispersion (D39) | Tobin's Q (G19) |
| positive shocks to dispersion (D39) | real investment (E22) |