Equity Market Valuation and Corporate Investments

36 Pages Posted: 22 Mar 2007

See all articles by Raj Aggarwal

Raj Aggarwal

University of Akron; Federal Reserve Banks - Federal Reserve Bank of Cleveland; Kent State University; Kent State University Foundation

Sijing Zong

California State University, Stanislaus - School of Business

Date Written: March 2007

Abstract

The relationship between equity market valuation and corporate investment is not clear with one research stream supporting the significant influence of equity valuation on investment while another stream deeming it a sideshow. However, unlike this study, prior literature does not account for the endogeneity between equity market returns and corporate investment for US firms. Using a simultaneous equations framework this study documents a strong and significant relationship between equity returns and corporate investment with equity prices showing a much higher impact on corporate investment than fundamental variables. The results are robust to variations in firm size, sign of firm cash flows, firm equity-dependence, and measures of equity market valuation.

Keywords: Capital Investments, Capital Budgeting, Corporate Valuation, Financing

JEL Classification: G31, G32, E44

Suggested Citation

Aggarwal, Raj and Zong, Sijing, Equity Market Valuation and Corporate Investments (March 2007). Available at SSRN: https://ssrn.com/abstract=972584 or http://dx.doi.org/10.2139/ssrn.972584

Raj Aggarwal (Contact Author)

University of Akron ( email )

Akron, OH 44325-4803
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Kent State University ( email )

College of Business Administration
Kent, OH 44242-0001
United States

Kent State University Foundation ( email )

Akron, OH 44325-4803
United States

Sijing Zong

California State University, Stanislaus - School of Business ( email )

Turlock, CA 95382
United States

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