TY  - JOUR
AU  - Baker,Malcolm
AU  - Stein,Jeremy C.
AU  - Wurgler,Jeffrey
TI  - When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8750
PY  - 2002
Y2  - January 2002
UR  - http://www.nber.org/papers/w8750
L1  - http://www.nber.org/papers/w8750.pdf
N1  - Author contact info:
Malcolm Baker
Baker Library 261
Harvard Business School
Soldiers Field
Boston, MA  02163
Tel: 617/495-6566
Fax: 617/496-5271
E-Mail: mbaker@hbs.edu

Jeremy C. Stein
Federal Reserve Board of Governors
20th Street and Constitution Ave., N.W.
Washington, DC 20551
E-Mail: jeremy.c.stein@frb.gov

Jeffrey Wurgler
Stern School of Business, Suite 9-190
New York University
44 West 4th Street
New York, NY  10012
Tel: 212/998-0367
Fax: 212/995-4233
E-Mail: jwurgler@stern.nyu.edu
AB  - 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 almost three times as sensitive to stock prices as firms in the bottom quintile. We also verify several other predictions of the  model.
ER  -