The Stock Market Boom and Manufacturing Investment

Abstract

This paper analyzes the link between the run-up on the stock market and fixed investments in manufacturing during the late 1990s. The stock market run-up may have led lenders to invest primarily in companies that have seen large stock price gains, possibly raising financial constraints for many manufacturing firms. Further, large stock market gains made investments in fixed assets less attractive, thereby offering corporate decision makers incentives to use corporate resources to support share prices through dividend payouts and share repurchases. I found that investment in manufacturing was impeded by the developments of the stock market. The reorientation of investment priorities in the face of rising stock prices is a consistent determinant of investment in manufacturing. The policy focus should be on offering incentives for corporate decision makers to prioritize productive investments over other uses of funds instead of means to entice lenders to increase lending to manufacturing firms.