The Stock Market, Profit, and Investment

Authors:
  • OBOlivier Blanchard
    Olivier Blanchard
  • CRChangyong Rhee
    Changyong Rhee
  • LSLawrence Summers
    Lawrence Summers
Publisher website
Google Scholar
Abstract
Should managers, when taking investment decisions, follow the signals given by the stock market even when those do not coincide with their own assessment of fundamentals? Do they? In this paper we review theoretical arguments and examine the empirical evidence. First, we look at the relation between investment, market valuation, and proxies for fundamentals over the last 90 years. Second, we look at the behavior of investment during the episodes associated with the crashes of 1929 and 1987. We find a limited role of market valuation, given fundamentals.