| Do Investors Forecast Fat Firms? (1999) | |||||||||||||
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| Conventional economic theory assumes that rms always minimize costs given the output they produce. News articles and interviews with executives, however, indicate that rms from time to time engage in cost-cutting exercises. One popular belief is that rms cut costs when they are in economic distress, and grow fat when they are relatively wealthy. We explore this hypothesis by studying how the stock market values of gold mining companies vary with gold prices. The value of a cost-minimizing, prot-maximizing rm is convex in the price of a competitively supplied input or output, but we nd 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 rm grows wealthy. We then address a number of potential alternative explanations and discuss where fat in these companies might reside. | |||||||||||||
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