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

By Philippe Aghion, Jeremy C. Stein. 2008

115 citations recorded by the source corpus.

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.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/cb6ebf96bec017ede3ee951ddb7aa8aaf714ce39

Citations in the corpus

• Stock-Based Compensation and CEO (Dis)Incentives (2008, unknown): “We obtain the following: Proposition 9: Let ω∗ ∈ [0, 1] be such that the following two conditions are satisfied L2 > L1(ω∗) ( 1− e−(β−G)h β −G ) (43) λ + β −G λH + β −G > L1 (ω∗) + λLL2 (1− cH)L1 (ω∗) + λHL2 (44)”
• How Does Capital Affect Bank Performance During Financial Crises (2013, unknown): “Market share is an important goal for most firms (e.g., Aghion and Stein, 2008), and banks often assess their performance relative to each other on that basis.”
• A Corporate Culture Channel: How Increased Shareholder Governance Reduces Firm Value (2013, unknown): “agerial short-termism (Stein (1989); Aghion and Stein (2008)).”
• The Real Effects of Financial Markets (2012, unknown): “Aghion and Stein (2008) make a related point, showing that managers will choose to pursue the strategy expected by the market.”