What goes up...

Stephen Bond

Published on 1 September 2001

What are the connections between stock market valuations of firms and business investment? Stephen R. Bond, of the Institute for Fiscal Studies and Nuffield College, Oxford, investigates.

The behaviour of share prices in recent years has been rather remarkable. An unusually long boom period of rapidly rising prices has been followed by sharp price falls in recent months. Conventional indicators like price-earnings ratios the ratio of a firm’s share price to its earnings per share and q ratios the ratio of a firm’s market capitalisation to the book value of its assets had reached extraordinarily high levels towards the end of the long bull market, and still look uncomfortably high in relation to their historical norms. Volatility, or the size of day to day fluctuations in share prices, has also been unusually high during this period.