THE 1929 STOCK MARKET: IRVING FISHER WAS RIGHT*

Ellen R. McGrattan · Edward C. Prescott

99 citations0/0 files storedInternational Economic Review

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Financial Markets and Investment Strategies Financial Reporting and Valuation Research Economic theories and models

Abstract

Many stock market analysts think that in 1929, at the time of the crash, stocks were overvalued.Irving Fisher argued just before the crash that fundamentals were strong and the stock market was undervalued.In this paper, we use growth theory to estimate the fundamental value of corporate equity and compare it to actual stock valuations.Our estimate is based on values of productive corporate capital, both tangible and intangible, and tax rates on corporate income and distributions.The evidence strongly suggests that Fisher was right.Even at the 1929 peak, stocks were undervalued relative to the prediction of theory.

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References

1980Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?2001The Stock Market and Capital Accumulation 1954The Great Crash, 1929 2005Taxes, Regulations, and the Value of U.S. and U.K. Corporations 1986The Prewar Business Cycle Reconsidered: New Estimates of Gross NationalProduct, 1869-1918 1989The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908 1963Productivity Trends in the United States.2000Is the Stock Market Overvalued?

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