Working Paper: NBER ID: w10999
Authors: Philippe Aghion; Jeremy C. Stein
Abstract: We develop a multi-tasking model in which a firm can devote its efforts either to increasing sales growth, or to improving per-unit profit margins by, e.g., cutting costs. If the firm's manager is concerned with the current stock price, she will tend to favor the growth strategy at those times when the stock market is paying more attention to performance on the growth dimension. Conversely, it can be rational for the stock market to weight observed growth measures more heavily when it is known that the firm is following a growth strategy. This two-way feedback between firms' business strategies and the market's pricing rule can lead to purely intrinsic fluctuations in sales and output, creating excess volatility in these real variables even in the absence of any external source of shocks.
Keywords: multitasking model; stock market; growth strategy; profit margins; excess volatility
JEL Codes: E32; E44; G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Managers prioritize growth (D25) | Excessive volatility in sales and output (E32) |
| Market perceives a firm as focusing on growth (D25) | Rewards growth performance (L25) |
| Rewards growth performance (L25) | Reinforces manager's focus on growth (D25) |
| Market shifts focus to margins (D49) | Managers adapt strategy (L21) |
| Managers adapt strategy (L21) | Abrupt changes in strategy (L21) |
| Abrupt changes in strategy (L21) | Further exacerbate volatility (E32) |
| Intensity of manager's concern for current stock prices (G19) | Amplifies fluctuations (E32) |
| Feedback loop between managerial strategies and stock market evaluations (L10) | Generates multiple equilibria (D50) |