Do Bubbles Lead To Overinvestment?: A Revealed Preference Approach
Many economists believe that the stock market plays an important role in efficiently allocating capital to its most productive uses. This standard story of the stock market was called into question by events in the late 1990s, when some observers believed that stock market overvaluation - or a bubble - led to overinvestment. Both the standard and overinvestment stories involve discount rates and, to differentiate between the two stories, this paper examines the discount rates used by firms in making their investment decisions.