How Distorting are Stock Market Valuations Really for
- Slides: 8
How Distorting are Stock Market Valuations Really for Corporate Investment? by Houdou Basse Mama Discussion by: Henrik Cronqvist
Structure • The paper is currently very long… (~80 pages) • Where is the beef? Takes long time to get to the “beef”: Results start on p. 46. • At times, it was difficult for me to follow the logic of the analysis. Tokyo Los Angeles • Make. Taipei it more to the point. • Suggestion: One paper – one idea.
Contribution & Framing • Title: How Distorting are Stock Market Valuations Really for Corporate Investment? • Primary contribution: Analysis of European firms. – What are the economic reasons for why we would a priori expect different results for European firms? – What can we learn more generally from this analysis? • Does our prior belief re: the question change? – First, clearly establish a prior. – Report results from analysis of European firms. – Explain how our prior should change.
Managers – Rational Forecasters? • In conclusions, paper states that “…managers appear to be rational forecasters…” (p. 66) • Doesn’t this contradict recent research? – Malmendier & Tate’s paper in the JF on “CEO Overconfidence and Corporate Investment”. – From Ben-David, Graham & Harvey’s WP on “Managerial Overconfidence and Corporate Policies”: • “Financial executives are miscalibrated: realized market returns are within the executives' 80% confidence intervals only 38% of the time. ”
What Model of Behavior? Managers Rational managers, rational investors Irrational managers, rational investors ? Investors Irrational Rational managers, irrational investors Irrational managers, irrational investors
No Reduction in Investment Post-Crises • No significant effect on investment following bust of bubbles. Can this really be correct? • The 2001 -2003 burst of the tech bubble is emphasized repeatedly in the paper. But how significant was the dotcom bubble in, e. g. , the PIGS countries? • The result that there was no impact of the 2008 financial crisis on corporate investment in Europe doesn’t square well with many people’s intuition (including mine!).
Welfare Effects • Best performance: Undervalued, “underinvesting” firms. • Why would underinvesting firms have the best performance? By definition, underinvesting means not undertaking some positive-NPV projects. Why would this result in superior performance? • Are the firms classified as underinvesting, actually investing optimally?
Overall Impressions Positives: Concerns: • Important research question: Relation between stock market and real investment. • Structure of the paper. • Analysis of “old” question with new, large data set of European firms. • Model of behavior: Irrational investors and irrational managers? • Potential public policy implications of the research. • Questions about some of the reported results. • Contribution and framing.
