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Growth vs. margins: destabilizing consequences of giving the stock market what it wants

Aghion, P.; Stein, J.C.; (2004) Growth vs. margins: destabilizing consequences of giving the stock market what it wants. (NBER Working Papers 10999). National Bureau of Economic Research: Cambridge, US. Green open access

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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.

Type: Working / discussion paper
Title: Growth vs. margins: destabilizing consequences of giving the stock market what it wants
Open access status: An open access version is available from UCL Discovery
Publisher version: http://www.nber.org/papers/w10999
Language: English
Additional information: Please see http://eprints.ucl.ac.uk/17716/ a version published in The Journal of Finance
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/17780
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