Equity Market Valuation and Corporate Investments
36 Pages Posted: 22 Mar 2007
Date Written: March 2007
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: Suggested Citation