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Journal of Finance Vol. 63 No. 3 2008

Growth versus Margins: Destabilizing Consequences of Giving the Stock Market What It Wants

Philippe Aghion1,2; Jeremy C. Stein3

1 Harvard University · 2 International Paper (United States) · 3 National Bureau of Economic Research

Abstract

We develop a model in which a firm can devote effort either to increasing sales growth, or to improving per‐unit profit margins. If the firm's manager cares about the current stock price, she will favor the growth strategy when the market pays more attention to growth numbers. Conversely, it can be rational for the market to weight growth measures more heavily when it is known that the firm is following a growth strategy. This two‐way feedback between firms' strategies and the market's pricing rule can lead to excess volatility in real variables, even absent any external shocks.

DOI
10.1111/j.1540-6261.2008.01351.x
Volume
63
Issue
3
Pages
1025-1058
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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