Working Paper: NBER ID: w19383
Authors: Avanidhar Subrahmanyam; Sheridan Titman
Abstract: Feedback from stock prices to cash flows occurs because information revealed by firms' stock prices influences the actions of competitors. We explore the implications of feedback within a noisy rational expectations setting with incumbent publicly traded firms and privately held new entrants. In this setting the equilibrium relation among stock prices and both future dividends and aggregate output depends on the strategic environment in which these firms operate. In general, under reasonable conditions, the relations between prices, dividends, and economic output in our framework are consistent with empirical evidence in the macroliterature. We also generate new, potentially testable, implications.
Keywords: financial markets; macroeconomy; stock prices; investment; economic activity
JEL Codes: E3; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stock prices (G19) | Cash flows (G19) |
| Cash flows (G19) | Investment choices of new entrants (G11) |
| Stock prices (G19) | Investment choices of new entrants (G11) |
| Investment choices of new entrants (G11) | Cash flows of public firms (G32) |
| Stock prices (G19) | Future dividends (G35) |
| Investment choices of new entrants (G11) | Future dividends (G35) |
| Shocks to stock market participation (G41) | Economic activity (E29) |