Working Paper: NBER ID: w3480
Authors: Nobuhiro Kiyotaki
Abstract: The paper studies under what conditions the value of the firm occasionally increases for a while before it suddenly drops, like a "bubble". We consider the environment where the trend of net cash flow from a firm's production depends on uncertain quality of a manager, and the manager is occasionally replaced by a new manager. People know whether the manager is replaced, but they do not know the exact quality of the manager so that they gradually learn about it. We show that, if the current manager is good, the value of the firm tends to increase more rapidly than the net cash flow because people become more and more optimistic about the current manager, until the optimism disappears with sudden retire of the manager. The value of the firms appears to contain a bubble because the value gradually deviates from the present value of the current net cash flow until the deviation disappears. We extend the basic model to allow the firm to replace unsuccessful managers endogenously, and show that the value of the firm more frequently deviates upward from the present value of the current net cash flow than downward.
Keywords: managerial quality; firm value; speculative bubbles; learning
JEL Codes: D81; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| perceived managerial quality (M54) | firm value (G32) |
| perceived managerial quality (M54) | net cash flow (G39) |
| firm value (G32) | net cash flow (G39) |
| managerial quality (L15) | firm value (G32) |
| managerial quality (L15) | net cash flow (G39) |
| firm value deviates from net cash flow (G32) | bubble-like behavior (E32) |
| frequency of upward deviations in firm value (G32) | downward deviations in firm value (G32) |
| agents' learning process (D84) | assessment of firm's value (G32) |