Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/72724 
Year of Publication: 
2006
Series/Report no.: 
Reihe Ökonomie / Economics Series No. 200
Publisher: 
Institute for Advanced Studies (IHS), Vienna
Abstract: 
Is real investment fully determined by fundamentals or is it sometimes affected by stock market misvaluation? We introduce three new tests that: measure the reaction of investment to sales shocks for firms that may be overvalued; use Fama-MacBeth regressions to determine whether overinvestment affects subsequent returns; and analyze the time path of the marginal product of capital in reaction to fundamental and misvaluation shocks. Besides these qualitative tests, we introduce a measure of misvaluation into standard investment equations to estimate the quantitative effect of misvaluation on investment. Overall, the evidence suggests that both fundamental and misvaluation shocks affect investment.
Subjects: 
investment
stock market
fundamentals
misvaluation, bubbles
real effects of financial markets
JEL: 
E44
E22
E32
G3
Document Type: 
Working Paper

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