Growth vs. Margins: Destabilizing Consequences of Giving the Stock Market What it Wants / Philippe Aghion, Jeremy C. Stein.

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Aghion, Philippe

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w10999.Publication details: Cambridge, Mass. National Bureau of Economic Research 2004.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We develop a multi-tasking model in which a firm can devote its efforts either to increasing sales growth, or to improving per-unit profit margins by, e.g., cutting costs. If the firm's manager is concerned with the current stock price, she will tend to favor the growth strategy at those times when the stock market is paying more attention to performance on the growth dimension. Conversely, it can be rational for the stock market to weight observed growth measures more heavily when it is known that the firm is following a growth strategy. This two-way feedback between firms' business strategies and the market's pricing rule can lead to purely intrinsic fluctuations in sales and output, creating excess volatility in these real variables even in the absence of any external source of shocks.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w10999 (Browse shelf(Opens below))	Not For Loan

Total holds: 0

December 2004.

We develop a multi-tasking model in which a firm can devote its efforts either to increasing sales growth, or to improving per-unit profit margins by, e.g., cutting costs. If the firm's manager is concerned with the current stock price, she will tend to favor the growth strategy at those times when the stock market is paying more attention to performance on the growth dimension. Conversely, it can be rational for the stock market to weight observed growth measures more heavily when it is known that the firm is following a growth strategy. This two-way feedback between firms' business strategies and the market's pricing rule can lead to purely intrinsic fluctuations in sales and output, creating excess volatility in these real variables even in the absence of any external source of shocks.