Ebook The Determinants of Stock Price and the Theory of Profit Maximization
The stock market has been in turmoil for some time now as a result of granting countless numbers of risky loans to people with bad credit combined with rising energy costs and a terrible housing market. According to Campbell and Kyle, “stock price equals the present value of expected future dividends, discounted at a constant rate.” In other words, the stock price of a company is based on the expected future profits of that company.
The goal of this study is to look at the determinants of stock prices to see how their values affect stock prices. If we can successfully find correlations between these economic variables and stock prices, it would be very useful in the real world.
More specifically, the purpose of this paper is to see how stock price growth is affected by the variables that affect profits as seen in the theory of profit maximization. I will look at different revenue and cost variables that affect the firm’s profitability, which in turn, affect the firm’s stock price.
First, I will provide an in depth look into the theory of profit maximization, describing each curve and the optimal production point of the firm. Second, I will gather empirical data to create a regression that captures the effect of rising input costs on the firm’s profitability and therefore its stock price. Finally, I will interpret each variable and its effect on stock price growth.
Contents
Chapter I: Introduction
- The Life of Charles Dow
The Origin of the Dow Jones Industrial Average
Two Periods of Economic History
An Example of a Rise in Input Prices
Chapter II: Theory of Profit Maximization
- The Theory of Profit Maximization
Independent Variables in My Model
Chapter III: Empirical Analysis—The Determinants of Stock Price
- The Regression Model
The Dow Jones Industrial Average and My Model
The Multiple Regression Model
Interpretation of Regression Results
Testing for Statistical Significance
R2 Discussion and Analysis
Formal F-Test
Introduction to Slope Dummy Variables
Chapter IV: Conclusion
Appendix A1
Works Cited
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