Fundamentals, Misvaluation, and Business Investment


  • We would like to thank seminar participants at the AFA, Bank of England, Bank of International Settlements, Bank of Italy, Cass Business School, Chicago/London Conference on Financial Markets, Dutch National Bank, Emory Business School, Frankfurt, Groningen, Institute for Advanced Studies (Vienna), Illinois at Chicago, Iowa, Kentucky, Loyola, MIT, Paris-I, NBER Behavioral Finance group, NBER Capital Markets and the Economy group, NBER Macroeconomics and Individual Decision-Making group, Saskatchewan, Toronto, and Urbino. We also thank the editor, three referees, and Olivier Blanchard, Jason Cummins, Steve Fazzari, S.P. Kothari, Sydney Ludvigson, and Linda Vincent for helpful comments and discussions and Mark Blanchette, Rose Cunningham, Hans Holter, Sadaquat Junayed, and Heidi Portuondo for research assistance. Chirinko and Schaller thank the European University Institute and MIT, respectively, for providing excellent environments in which to begin this research, Chirinko thanks the Bank of England for financial support under a Houblon-Norman/George Senior Fellowship, and Schaller thanks the SSHRC for financial support. All errors and omissions remain the sole responsibility of the authors, and the conclusions do not necessarily reflect the views of the supporting institutions.


Does stock market misvaluation affect business fixed investment? To answer this question, we provide evidence based on U.S. firm-level panel data. We examine the orthogonality conditions for the investment Q and Euler equations, and our qualitative tests reject the null hypothesis that investment is unaffected by misvaluation (this result is not driven exclusively by the late 1990s). To measure the quantitative effects on investment, we introduce a measure of misvaluation into standard investment equations. Our estimates imply that a one-standard-deviation increase in misvaluation increases investment between 20% and 60% relative to the mean level of investment in the sample.