Wall Street and Silicon Valley : a Delicate Interaction
Financial markets look at data on aggregate investment for clues about underlying profitability. At the same time, firms' investment depends on expected equity prices. This generates a two-way feedback between financial market prices and investment. In this paper we study the positive and normative implications of this interaction during episodes of intense technological change, when information about new investment opportunities is highly dispersed. Because high aggregate investment is quot;good newsquot; for profitability, asset prices increase with aggregate investment. Because firms' incentives to invest in turn increase with asset prices, an endogenous complementarity emerges in investment decisions -- a complementarity that is due purely to informational reasons. We show that this complementarity dampens the impact of fundamentals (shifts in underlying profitability) and amplifies the impact of noise (correlated errors in individual assessments of profitability). We next show that these effects are symptoms of inefficiency: equilibrium investment reacts too little to fundamentals and too much to noise. We finally discuss policies that improve efficiency without requiring any informational advantage on the government's side
Year of publication: |
[2015]
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Authors: | Angeletos, George-Marios |
Other Persons: | Lorenzoni, Guido (contributor) ; Pavan, Alessandro (contributor) |
Publisher: |
[2015]: [S.l.] : SSRN |
Saved in:
freely available
Extent: | 1 Online-Ressource (51 p) |
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Series: | NBER Working Paper ; No. w13475 |
Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments October 2007 erstellt |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10012750324
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