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Fundamentals, Misvaluation, and Business Investment

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  • ROBERT S. CHIRINKO
  • HUNTLEY SCHALLER
Abstract
Does stock market misvaluation affect business fixed investment? To answer this question, we provide evidence based on U.S. firm‐level panel data. We examine the orthogonality conditions for the investment Q and Euler equations, and our qualitative tests reject the null hypothesis that investment is unaffected by misvaluation (this result is not driven exclusively by the late 1990s). To measure the quantitative effects on investment, we introduce a measure of misvaluation into standard investment equations. Our estimates imply that a one‐standard‐deviation increase in misvaluation increases investment between 20% and 60% relative to the mean level of investment in the sample.

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  • Robert S. Chirinko & Huntley Schaller, 2011. "Fundamentals, Misvaluation, and Business Investment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1423-1442, October.
    • Handle: RePEc:wly:jmoncb:v:43:y:2011:i:7:p:1423-1442
    DOI: 10.1111/j.1538-4616.2011.00430.x
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    4. Shi, Lisi & Suen, Richard M. H., 2014. "The Macroeconomic Consequences of Asset Bubbles and Crashes," MPRA Paper 57045, University Library of Munich, Germany.
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    8. Sirio Aramonte & Matthew Carl, 2021. "Firm-level R&D after periods of intense technological innovation: the role of investor sentiment," BIS Working Papers 916, Bank for International Settlements.

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