Stock price related financial fragility and growth patterns
The total output of an economy usually follows cyclical movements which are accompanied by similar movements in stock prices. The common explanation relies on the demand side. It points out that stock market wealth drives consumption which triggers production afterwards. This paper focuses on influe...
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| Format: | Article |
| Language: | English |
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De Gruyter
2020-12-01
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| Series: | Economics: Journal Articles |
| Subjects: | |
| Online Access: | https://doi.org/10.5018/economics-ejournal.ja.2020-10 |
| _version_ | 1811228034272854016 |
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| author | Aßmuth Pascal |
| author_facet | Aßmuth Pascal |
| author_sort | Aßmuth Pascal |
| collection | DOAJ |
| description | The total output of an economy usually follows cyclical movements which are accompanied by similar movements in stock prices. The common explanation relies on the demand side. It points out that stock market wealth drives consumption which triggers production afterwards. This paper focuses on influences via the supply side of the economy. The aim of the paper is to explore channels where stock price patterns influence the amount of credit taken by firms. The author examines trend and volatility cycles on the stock market. There are three channels addressed: the stock market valuation as piece of information for the assessment of a firm’s creditworthiness, the influence on restructuring prospects in times of financial distress and the stock market related remuneration of the top management affecting capital demand. The author ask to which extent a channel may contribute to the stock price - output relation when there is mutual feedback. A model à la Delli Gatti et al. (A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility, 2005) drives the results. Firms take credit to finance their production which determines their financial fragility. If their stochastic revenue is too low, they are bankrupt and leave the economy. The capital loss hurts the bank’s equity base and future credit supply is diminished. This causes business cycles. Results show that if the bank assesses creditworthiness according to the stock price then idiosyncratic stock price fluctuations have only a slight effect as they disturb selection and hinder growth. If stock market optimism matters for bankruptcy ruling the level of stock owners’ influence does not matter. If optimism is wide spread among stock investors however, investment behaviour is also correlated through the stock prices and this results in huge real economy cycles without any long-term growth. If volatility is considered in the decision of managers they act more prudently and this fosters growth. |
| first_indexed | 2024-04-12T09:51:42Z |
| format | Article |
| id | doaj.art-1541220586ec48fa819899fea7c41266 |
| institution | Directory Open Access Journal |
| issn | 1864-6042 |
| language | English |
| last_indexed | 2024-04-12T09:51:42Z |
| publishDate | 2020-12-01 |
| publisher | De Gruyter |
| record_format | Article |
| series | Economics: Journal Articles |
| spelling | doaj.art-1541220586ec48fa819899fea7c412662022-12-22T03:37:48ZengDe GruyterEconomics: Journal Articles1864-60422020-12-0114110.5018/economics-ejournal.ja.2020-10Stock price related financial fragility and growth patternsAßmuth Pascal0University of BielefeldThe total output of an economy usually follows cyclical movements which are accompanied by similar movements in stock prices. The common explanation relies on the demand side. It points out that stock market wealth drives consumption which triggers production afterwards. This paper focuses on influences via the supply side of the economy. The aim of the paper is to explore channels where stock price patterns influence the amount of credit taken by firms. The author examines trend and volatility cycles on the stock market. There are three channels addressed: the stock market valuation as piece of information for the assessment of a firm’s creditworthiness, the influence on restructuring prospects in times of financial distress and the stock market related remuneration of the top management affecting capital demand. The author ask to which extent a channel may contribute to the stock price - output relation when there is mutual feedback. A model à la Delli Gatti et al. (A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility, 2005) drives the results. Firms take credit to finance their production which determines their financial fragility. If their stochastic revenue is too low, they are bankrupt and leave the economy. The capital loss hurts the bank’s equity base and future credit supply is diminished. This causes business cycles. Results show that if the bank assesses creditworthiness according to the stock price then idiosyncratic stock price fluctuations have only a slight effect as they disturb selection and hinder growth. If stock market optimism matters for bankruptcy ruling the level of stock owners’ influence does not matter. If optimism is wide spread among stock investors however, investment behaviour is also correlated through the stock prices and this results in huge real economy cycles without any long-term growth. If volatility is considered in the decision of managers they act more prudently and this fosters growth.https://doi.org/10.5018/economics-ejournal.ja.2020-10heterogeneous agents modelsfinancial fragilitystock pricesbusiness cyclese32g30c63 |
| spellingShingle | Aßmuth Pascal Stock price related financial fragility and growth patterns Economics: Journal Articles heterogeneous agents models financial fragility stock prices business cycles e32 g30 c63 |
| title | Stock price related financial fragility and growth patterns |
| title_full | Stock price related financial fragility and growth patterns |
| title_fullStr | Stock price related financial fragility and growth patterns |
| title_full_unstemmed | Stock price related financial fragility and growth patterns |
| title_short | Stock price related financial fragility and growth patterns |
| title_sort | stock price related financial fragility and growth patterns |
| topic | heterogeneous agents models financial fragility stock prices business cycles e32 g30 c63 |
| url | https://doi.org/10.5018/economics-ejournal.ja.2020-10 |
| work_keys_str_mv | AT aßmuthpascal stockpricerelatedfinancialfragilityandgrowthpatterns |