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New Perspectives on Asset Price Bubbles$
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Douglas D. Evanoff, George G. Kaufman, and A. G. Malliaris

Print publication date: 2012

Print ISBN-13: 9780199844333

Published to Oxford Scholarship Online: April 2015

DOI: 10.1093/acprof:osobl/9780199844333.001.0001

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Do Bubbles Lead to Overinvestment? A Revealed Preference Approach

Do Bubbles Lead to Overinvestment? A Revealed Preference Approach

(p.433) Chapter 17 Do Bubbles Lead to Overinvestment? A Revealed Preference Approach
New Perspectives on Asset Price Bubbles

Robert S. Chirinko

Huntley Schaller

Oxford University Press

This chapter examines whether the stock market occasionally overvalues firms and these asset price bubbles lead to overinvestment, paying particular attention to the distortive impact of bubbles on efficient capital allocation regardless of whether they burst or not. Using a revealed preference approach that relies on the investment decisions of firms, combined with investment theory, it estimates the discount rates actually used by managers of U.S. firms. It presents empirical evidence to support the theory that firms with high stock prices and poor investment opportunities should have discount rates consistently below the market rate, consistent with a misallocation of resources during bubbles.

Keywords:   asset price bubbles, overinvestment, capital allocation, investment, discount rates, stock prices, market rate, stock market

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