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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26579

Title: When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms
Authors: Baker, Malcolm
Stein, Jeremy C.
Wurgler, Jeffrey
Issue Date: 9-Oct-2001
Series/Report no.: FIN-01-031
Abstract: We use a simple model of corporate investment to determine when investment will be sensitive to non-fundamental movements in stock prices. The key cross-sectional prediction of the model is that stock prices will have a stronger impact on the investment of firms that are “equity dependent” – firms that need external equity to finance their marginal investments. Using an index of equity dependence based on the work of Kaplan and Zingales (1997), we find strong support for this prediction. In particular, firms that rank in the top quintile of the KZ index have investment that is two-and-a-half times as sensitive to stock prices as firms in the bottom quintile. We also verify several other predictions of the model.
URI: http://hdl.handle.net/2451/26579
Appears in Collections:Finance Working Papers

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