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Do investors forecast fat firms? Evidence from the gold‐mining industry
Author(s) -
Borenstein Severin,
Farrell Joseph
Publication year - 2007
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.0741-6261.2007.00104.x
Subject(s) - financial distress , stock (firearms) , value (mathematics) , stock price , business , economics , monetary economics , gold mining , industrial organization , financial economics , financial system , mechanical engineering , paleontology , machine learning , series (stratigraphy) , computer science , engineering , biology , chemistry
Conventional economic theory assumes that firms minimize costs given output, but news articles and managers indicate that firms cut costs when they are in economic distress and grow fat when they are relatively wealthy. Under conventional theory, firm value is convex in the price of a competitively supplied input or output, but we find that the stock values of many gold‐mining companies are concave in the price of gold. We show that this is consistent with fat accumulation when a firm grows wealthy. We then address alternative explanations and discuss where fat in these companies might reside.