TAILIEUCHUNG - Do stock price bubbles influence corporate investment?

Some works have more recently focused on major European, Asian and Latin American emerging markets. In general, these studies show significant short- and long-term relationships between oil price changes and emerging stock market returns. Using a VAR model, Papapetrou (2001) shows a significant relationship between oil price changes and stock markets in Greece. Basher and Sadorsky (2006) use an international multifactor model and reach the same conclusion for other emerging stock markets. . | Available online at ELSEVIER Journal of Monetary Economics 52 2005 805-827 Journal of MONETA EOONMCS locate jme Do stock price bubbles influence corporate investment Simon Gilchrista b 5 Charles P. Himmelbergc Gur Hubermand aDepartment of Economics Boston University Boston MA 02215 USA NBER Cambridge MA 02138 USA cFederal Reserve Bank of New York 33 Liberty Street New York NY 10045 USA dBusiness School Columbia University 3022 Broadway New York NY 10027 USA Received 11 October 2002 received in revised form 1 March 2005 accepted 3 March 2005 Abstract Dispersion in investor beliefs and short-selling constraints can lead to stock market bubbles. This paper argues that firms unlike investors can exploit such bubbles by issuing new shares at inflated prices. This lowers the cost of capital and increases real investment. Perhaps surprisingly large bubbles are not eliminated in equilibrium nor do large bubbles necessarily imply large distortions. Using the variance of analysts earnings forecasts to proxy for the We are grateful to Anna Scherbina for providing us with data and we thank Andy Abel Tobias Adrian Ignazio Angeloni Brian Chernoff Wei Jiang Bob King Jim Mahoney David Marshall Asani Sarkar Jeremy Stein and seminar participants at the Federal Reserve Bank of New York Federal Reserve System Meetings Federal Reserve Bank of San Francisco Colorado University Columbia University Harvard University University of Brescia the ASSA meetings and the JME Gerzensee Conference on Behavioral Macroeconomics for helpful comments and suggestions. We are also grateful to Brian Chernoff for excellent research assistance. The views expressed are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Corresponding author. Department of Economics Boston University 270 Bay State Road Boston MA 02215 USA. Tel. 1 617353 6824. E-mail address sgilchri@ S. Gilchrist .

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