RDP 9610: Share Prices and Investment 6. Conclusion

The aim of this paper was to examine two related propositions; whether or not share prices are efficient and, to the extent that any inefficiencies exist, whether they distort investment decisions. In line with overseas studies we find evidence of departures from share-market efficiency over short time horizons but not over longer time horizons.

As expected, the estimated fundamental component of real share prices was found to have a stronger relationship with investment than the aggregate real share-price series. Despite some evidence of share price inefficiencies, the speculative component of real share prices is insignificant in the same investment equations implying that the short-term departures from share-market efficiency do not significantly influence investment spending. We also found, however, that equity raising decisions are influenced by both fundamental and speculative price movements, implying that valuation effects do influence corporate financing decisions.